US inflation rate eases to 3.5% as gasoline prices fall

Inflation in the US eased last month as the cost of energy and filling up at the pumps fell, official figures show.

Prices rose 3.5% in the year to June, according to the Bureau of Labor Statistics (BLS), down from 4.2% recorded in May.

Gasoline prices decreased 9.7% last month, but are still much more expensive than a year ago. On Tuesday, the national average had risen to $3.86 a gallon from $3.79 a week ago, according to motorist advocacy group AAA.

While the rate of inflation has fallen more than expected, the easing of price rises could be short-lived due to the renewed conflict in the Middle East sending global oil prices up again.

The price of a barrel of Brent crude, which is the global benchmark for oil, hit $87 on Tuesday, an increase of almost $10 in the space of 24 hours.

The spike in the price of the commodity came after the fresh military strikes on Iran by the US this week, with President Donald Trump declaring a new naval blockade in the Strait of Hormuz and a 20% charge on all cargo being shipped through the key waterway used for global trade.

The escalation has already led analysts to predict that inflation will rise in the coming months and that interest rate cuts are unlikely anytime soon.

“Gasoline prices are already back above June levels, meaning the next inflation report will heat up again,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Ahead of his first address to the US Congress later, newly appointed Federal Reserve chairman Kevin Warsh said his committee had “no tolerance to persistently elevated inflation”.

“We share a resolute commitment to restoring price stability,” he said in prepared comments.

The Fed held US interest rates between 3.5% and 3.75% at Warsh’s first meeting in June and some analysts suggest rates could be raised in the coming months.

President Trump pushed Warsh’s predecessor, Jerome Powell, to cut interest rates, and has made it clear he expects Warsh to fulfil his demand for reductions in borrowing costs for Americans.

But Lindsay James, investment strategist at wealth management firm Quilter, said despite Warsh having got his “feet under the table, it does not mean rate cuts are looming in order to appease President Trump”.

“Instead, we are likely to see a conservative outlook from the Federal Reserve when it meets in a fortnight,” she added.

While energy prices fell 5.7% last month, food price inflation increased further, with the cost of meat, poultry, fish and eggs going up, along with dairy products and cereals.

However, eating out remains more expensive, with meals on average costing 3.7% more than they did last year.
While the overall inflation rate fell in June, lower inflation does not mean that prices are getting cheaper, it is just that they are rising at a slower pace.

So-called core inflation, which strips out food and energy prices that are seen as volatile, remained unchanged in June at 2.6%.

That figure is what will be closely monitored by the Fed when it comes to deciding whether to cut, hold or raise interest rates.

Federal Reserve governor Christopher Waller warned on Monday that policymakers would have to consider raising rates.

“If we get another hot reading on core inflation this week, then the FOMC (Federal Open Market Committee) will need to consider tightening monetary policy in the near term,” Waller told the New York Association for Business Economics.

“Sternly staring at inflation until it melts before our withering gaze is not an option.”

The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.

But it is a balancing act, as high interest rates can harm the economy as businesses may hold off from investing in production and jobs. Interest rate cuts, which Trump has called for, can boost the economy by lowering borrowing costs and encouraging spending and investment.

On Tuesday, more than a fifth of small business owners in the US reported that inflation was their “single most important” problem, the highest amount for almost two years, according to the National Federation of Independent Business.

By BBC News