Inflation continued to soften in June after hitting a five-year-high just five months ago, possibly undermining the belief of some Federal Reserve officials that the slowdown is just temporary.
The Labor Department reported Friday that the consumer price index, or cost of living, was unchanged last month, while the rate of inflation over the past 12 months slowed to 1.6% from 1.9% in the prior month.
Economists polled by MarketWatch had forecast a 0.1% increase in the CPI. In February, the year-on-year inflation rate hit the five-year high of 2.7% but has been softening ever since.
“Most senior Fed officials had believed the slowdown in inflation was temporary, but now they have been forced to reassess their views,” MarketWatch said. “Although the Fed had been expected to raise [interest] rates once more this year, a closely followed Wall Street forecasting site now puts the odds at close to zero.”
“On the basis of June’s data, it is getting harder for the Fed to continue claiming that this is a temporary drop-off,” said Paul Ashworth, chief U.S. economist at Capital Economics.
The flat CPI reading for June reflected in large part a 1.6% decline in energy prices as Americans paid less for gasoline, natural gas and electricity. The cost of food also leveled off after five straight increases.
“Grocery prices have actually declined in the past year, but the cost of takeout and eating out has risen sharply, perhaps reflecting the impact of minimum wage increases in many states,” MarketWatch noted.
The so-called core CPI, which strips out food and energy costs, edged up 0.1% in June, matching the increase of the two previous months. The core CPI increased 1.7% year-on-year — still short of the Fed’s 2% target.
The benign inflation rate “could cast doubts on the Federal Reserve’s ability to increase interest rates for a third time this year,” CNBC said.