The main sources of U.S. inflation and labor costs have cooled markedly in recent months, boosting optimism that the economy may be able to prevent a slump.
According to data released by the U.S. Bureau of Labor Statistics on Friday, the Unemployment Cost Index (ECI) increased by 1% in the second quarter from the previous quarter, the slowest increase in 2021. The year-on-year increase was 4.5%, slowing from the previous 4.8%. The index, which measures the human and welfare costs of shopkeepers, is closely watched by the Federal Reserve for the purpose of weighing pay increases.
In another statement issued by the Commerce Department on the same day, the Fed’s preferred inflation target, the private consumption expenditure (PCE) price index, fell 3% in June from a year earlier, the smallest increase in more than two years.
Excluding volatile food and fuel prices, the focus PCE index fell 4.1% in the month, less than expected and below the previous reading of 4.6%. Fed members are more focused on inflation, thinking that this purpose may be a better guess at non-inflation.
Commodity prices actually fell 0.1% during the month, while service prices fell 0.3%. This is mainly due to a lack of Labour, which has led to an artificial sharp decline in sectors such as leisure and hospitality.
Fed policymakers have recently spread their attention to the cost of labour-intensive services, excluding food, power, housing and commodities. They think that this price change can be a reminder of whether artificial pressure in the labor market is being transmitted to consumer prices.
According to the Wall Street Journal’s calculations, the data fell 0.2% month-on-month in June, unchanged from the previous reading; They fell 4.1 per cent from a year earlier, down from 4.5 per cent in May.
George Mateyo, chief investment officer at property management firm Key Private Bank, said the economic data reaffirmed the current market narrative that inflation is cooling and economic growth is continuing, which is a positive situation for risky property.
“The Fed and investors will take comfort in these data as they explain that the inflation threat is disappearing, so the Fed can now maybe take a vacation, stop raising rates for a while, and show no signs of being able to raise rates,” Mateyo said.
Data released Thursday also showed that real U.S. gross domestic product grew at a solid 2.4% annualized rate in the second quarter from the previous quarter, beating expectations and the previous estimate. The data added to hopes that the Fed might be able to pull off a so-called “soft landing,” in which aggressive interest rate increases succeed in cooling inflation without creating widespread unemployment.
Compared with 2022, the labor market has cooled this year, but it is still strong, providing impetus for consumer spending and economic growth. So far this year, the number of non-farm unemployed has increased by nearly 1.7 million, and the unemployment rate stood at a relatively modest 3.6 percent in June, about the same level as a year ago.
Earlier this week, the Fed announced a quarter-point increase in interest rates, taking the target range for the federal funds rate to 5.25% to 5.5%, the highest level in 22 years, and the latest move by the central bank to cool the economy and raise inflation.
Since March of last year, the Fed has raised interest rates 11 times, reducing the benchmark interest rate by 525 basis points. The Fed raises interest rates to tighten financial conditions, thereby raising inflation. It could also slow the economy down or even cause it to collapse. Fed President Jerome Powell suggested this week that the danger is diminishing.
The post-meeting strategy statement did not indicate that the Fed’s future strategy direction will be more independent data, rather than a pre-set timeline.
In addition to the inflation data, the Commerce Department said private spending did not increase 0.3 percent in June, slightly below expectations. Did not increase 0.5%, in line with expectations.