Inflation Slowed to 3% in June, Bolstering Expectations for Interest Rate Cuts

Annual inflation eased again in June, signifying that the Federal Reserve may cut interest rates sometime this year.

The Consumer Price Index (CPI) for all items rose 3% for the 12 months ending in June, before seasonal adjustment, the U.S. Bureau of Labor Statistics (BLS) reported July 10. That’s down from the 3.3% year-over-year increase notched in May.

On a monthly basis, the CPI declined 0.1%, after being unchanged in May. That’s lower than the 0.1% increase many had forecast.

The index for gasoline fell 3.8% in June, after declining 3.6% in May, more than offsetting an increase in shelter, the BLS said. The energy index fell 2% over the month, while the index for food increased 0.2% in June.

Core inflation—which excludes the more volatile food and energy prices—rose 3.3% year-over-year, a dip from the 3.4% rise in May.

Taken together with the BLS June 2024 Jobs Report—which found that the labor market is starting to balance out—the data provides evidence that the economy is returning to what it looked like before the pandemic, said Sydney Ross, junior economic researcher at SHRM. “The labor market is beginning to stabilize and is not as tight as it was at the beginning of the year,” she said.

However, for employers, it still is likely too soon to change course on pay or benefits (many employers have given higher pay increases in the past couple of years, partly in response to high inflation).

“Because there is still a lot of uncertainty around whether inflation will start to tick up again, another month of a downward trend may not mean it’s time to start changing their salary and total rewards strategies just yet,” Ross said.

Another month of slowing inflation might indicate that the Federal Reserve will soon look to cut interest rates, as the bank “has been waiting for consistent incoming economic data that inflation is decelerating toward their 2% target before making any moves on cutting interest rates,” Ross said. Federal Reserve Chair Jerome Powell said this week that recent inflation data had given the central bank more confidence in stabilizing prices, but he wants to see “more good data” before cutting rates.

Interest rate cuts would be a welcome move for employees, who have continued to struggle with their financial wellness. Bank of America in May found that employees are even more concerned about inflation this year than they were last year: 76% of workers say the cost of living is outpacing growth in their salary or wages, a big jump from the 67% who said so in June 2023. And 66% of workers said they feel stressed about their finances.

“This could alleviate some of the financial constraints households and businesses have faced due to high interest rates as a result of the tight monetary policy stance of the Fed,” Ross said.

Real Earnings

Meanwhile, real average hourly earnings increased 0.8%, seasonally adjusted, from June 2023 to June 2024, the BLS reported separately Thursday. The change in real average hourly earnings combined with a decrease of 0.3% in the average workweek resulted in a 0.6% increase in real average weekly earnings over this period.