Is the Battle Against Inflation Over?

Price increases have been slowing.
Reuters
By Yuval Rosenberg

Happy Wednesday! It was a scorcher, with the National Weather Service issuing heat alerts affecting 108 million Americans. One thing cooling off: inflation. Here’s the latest.

Inflation Drops to Lowest Level in More Than 2 Years

The latest inflation numbers provided a pleasant surprise Wednesday, as the Bureau of Labor Statistics reported that the consumer price index in June rose by the smallest amount in more than two years.

The CPI rose 0.2% on a monthly basis and 3.0% on an annual basis, the Bureau said, with both figures coming in below analysts’ consensus expectations. The closely watched core CPI measure, which leaves out volatile food and fuel prices, was also better than expected, rising 0.2% on a monthly basis and 4.8% on an annual basis. The headline inflation rate has fallen for 12 straight months after peaking at 9.1% in June 2022.

A big drop in energy prices helped push the topline inflation number lower, with gasoline prices down 26.5% compared to a year ago. Used car prices, which contributed to the big runup in inflation during the pandemic, dropped as well, down 5.2% on an annual basis. Still, the prices of many goods continue to rise, albeit at a slower rate. Food is 5.7% more expensive than a year ago, and shelter costs are up 7.8%.

An improving situation: Overall, the data represent a considerable improvement in the inflation picture in recent months. The New York Times Jeanna Smialek said the latest data offer “some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago.”

Bill Adams, chief economist at Comerica Bank, said that the fight against inflation appears to be having its intended effect. “After a punishing stretch of high inflation that eroded consumer's purchasing power, the fever is breaking,” he wrote in a note to clients. A separate report showed that average real hourly earnings rose from May to June by 0.2% and are up 1.2% over the last year, indicating that workers may finally be getting the better of inflation through higher wages.

Speaking at the Economic Club of New York, National Economic Council Director Lael Brainard celebrated the growing evidence of a soft landing. “The economy is defying predictions that inflation would not fall absent significant job destruction,” she said in her prepared remarks. “Annual inflation has now declined every month for 12 months in a row, and inflation in the United States is now the lowest among G-7 nations … even as our economic recovery from the pandemic has been the strongest.”

Describing the inflation data as “light and refreshing,” JPMorgan chief economist Michael Feroli said in a note that “the narrow path to a soft landing looks a smidgeon wider” following the release of today’s report.

How the Fed may react: Some economists called on the Federal Reserve to hold off on another interest rate increase in light of the report. “There is no justification for the Fed to raise rates again,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics and a noted inflation dove who has expressed concerns about the central bank causing an unnecessary recession through excessive tightening.

Moody’s Chief Economist Mark Zandi also said the Fed should think carefully about any new rate hikes. “One couldn’t ask for a better report on consumer price inflation,” he tweeted. “Inflation is definitively throttling back, and while today’s report overstates the case, there is a strong case that inflation is headed in the right direction. The Fed should rethink the need for more rate hikes.”

Others, however, argue that the good report does not mean that the economy is in the clear just yet, with inflation still running well above the Fed’s target rate of 2%. “I think the Fed should remain vigilant,” Douglas Holtz-Eakin, the former director of the Congressional Budget Office who now leads a conservative think tank, told The Washington Post. Noting that energy prices could spike again, pushing a whole host of other prices higher as well, Holtz-Eakin said he expects the Fed to raise rates two more times this year — the consensus outlook from before the release of today’s numbers.

JPMorgan’s Feroli agreed with the consensus view. “There may be a few doves on the FOMC [Federal Open Market Committee] who would be willing to see how far this process can run without additional tightening, but we expect that the Fed leadership is still strongly inclined to hike in two weeks, and we look for an additional 25bp [basis point] move later this month before the Committee goes on extended pause,” he wrote.

Richmond Federal Reserve President Thomas Barkin, who serves on the FOMC, signaled that he thinks the central bank must hold firm on rate hikes. “Inflation is too high,” Barkin said Wednesday. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”

Still, some experts argued that the case for a second hike later in the year may have grown weaker. “My guess is that they’re so locked in on another increase in July that they’ll go ahead with that,” said David Wilcox of the Peterson Institute for International Economics, per The Wall Street Journal. “The main effect it will have is to really fortify the argument around July’s hike being the last of this campaign.”

Rates tumble: The good news on inflation sent Treasury rates sharply lower as traders contemplated a potentially less aggressive stance by the Fed. The yield on the 2-year Treasury dropped 15 basis points to 4.74% while the 10-year fell 12 basis points to 3.86%.

Still, the good economic news doesn’t seem to be helping President Joe Biden much, despite his efforts to show that “Bidenomics” is helping ordinary Americans. A Reuters poll released before the inflation report Wednesday shows that Biden’s approval ratings remain around 40%, with many respondents saying that the economy is their biggest worry.

GOP Culture War Fights Complicate McCarthy’s Plan to Pass Defense Bill

House Republican leaders reportedly had hoped to clear the massive, must-pass annual defense authorization bill this week, but those plans now look likely to be dashed as far-right members of their own party again present challenges for Speaker Kevin McCarthy and his team.

How we got here: House conservatives were angered by the deal to raise the debt limit that Speaker Kevin McCarthy struck with the White House weeks ago and have since pressured him to tack to the right on both fiscal and culture war issues, going so far as to temporarily block legislative action in the chamber.

On the National Defense Authorization Act, conservatives have pushed for a slew of amendments involving hot-button social issues ranging from abortion to Pentagon diversity efforts. Those demands have threatened support for the bill from Democrats and moderate Republicans and led GOP leaders to split the rules package governing consideration of the bill into two sections, leaving the most contentious issues for later.

What’s next: “That drama isn’t over yet, with the right’s ever-growing slate of demands increasingly likely to delay final votes on the bill until next week, and its ultimate passage still a question mark,” Politico’s Sarah Ferris and Olivia Beavers report.

McCarthy reportedly is trying to convince his members to keep amendments to the defense bill related to defense and set aside unrelated fights for the moment. But some Freedom Caucus members reportedly remain undeterred.

Why it matters: Congress has passed the NDAA for 62 years in a row, but the skirmish over this year’s bill is just the latest example of the difficulty McCarthy faces in legislating with a narrow five-seat majority.

Ferris and Beavers note that “conservatives are plotting other problems to come for McCarthy, who has precious little floor time left and an entire government to try to fund before current cash expires on Sept. 30.” They add that the bill funding the Department of Veterans Affairs and military personnel also faces an abortion-related delay.

And while right-wing hardliners have caused McCarthy the most headaches, they aren’t the only group he has to contend with in trying to advance his agenda. Politico reports: “Plans to take up a major GOP tax package by September are now stalled thanks to a separate group of members from New York and California who say they’ll refuse to advance the package without a major tax incentive for their districts.”

The biggest fights may still be ahead, as lawmakers turn to passing the annual appropriations bills and conservatives continue to demand larger spending cuts.

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