Inflation at 3% gives Biden and Bidenomics a major boost.
Annual Inflation Slows to 3% in June, Good News for Bidenomics
The Biden administration received a positive development as annual inflation slowed to 3% in June, according to the Bureau of Labor Statistics. This drop of a full percentage point in headline inflation is a welcome sign, especially considering the Federal Reserve’s efforts to lower price pressures by raising interest rates.
Consumer Price Index Update
The much-anticipated update to the consumer price index reveals that while inflation is still too high, it is cooling down in response to the Fed’s aggressive interest rate hikes. Since last March, the Fed has raised rates significantly, with the target rate now at 5% to 5.25%. This report marks 12 straight months of declines in annual inflation after reaching a peak of 9.1% last June. In fact, June’s report shows the smallest rise in annual inflation since March 2021.
Meanwhile, “core inflation,” which excludes volatile food and energy prices, fell to 4.8% in the year ending in June.
“Net, net, inflation isn’t dead, but the extraordinary pandemic push on prices from shortages and shift to stay-at-home purchases is clearly over, and the Fed, for the first time, has the upper hand in its inflation fight,” said Chris Rupkey, chief economist at FWDBONDS. “The Fed can be more confident today that its higher interest rates policy is finally starting to bear fruit.”
The Fed recently paused rate-hiking for the first time since its tightening cycle began, but officials have indicated that this pause is expected to be temporary. They have also penciled in the possibility of two more rate revisions by the end of the year.
Soaring inflation has taken a toll on households over the past two years and has affected support for President Joe Biden and his economic agenda. Republicans have used rising prices as a weapon to attack the administration, blaming big spending bills like Biden’s pandemic relief legislation for driving inflation.
This report brings some relief to consumers who have been struggling with higher prices, making life more unaffordable. The cost of food, in particular, has been a challenge for many households, with the price of bread rising by 11.5% over the last year and fats and oils increasing by 8.7%.
On the other hand, some energy products, such as fuel oil, have seen a decrease on a month-to-month basis, and many items have experienced significant price drops compared to the previous year. Regular unleaded gasoline fell by 26.5% annually, while motor oil dropped by 26.7%.
Banking Sector and Economic Volatility
The country’s banking sector continues to be closely watched following the sudden failure of Silicon Valley Bank in March. This event triggered a series of other bank collapses and caused regional banks to experience plunging stock values. While the federal government intervened to mitigate the worst of the fallout, economists are still monitoring the banking system due to the overall volatility of the economy amid the Fed’s rate-hiking.
Red-Hot Labor Market and Housing Market
Despite the barrage of rate hikes, the labor market remains a strong spot for the economy. In June, the Bureau of Labor Statistics reported the addition of 209,000 jobs. While still robust, this fell below the forecast expectations of 225,000 and marked the first report in months that came in below the consensus prediction. It was also the slowest pace of job growth since December 2020.
Another interesting development in recent months is the resurgence of the housing market, which many economists believed had fallen into a recession last year due to supply issues with existing homes. In fact, home prices reached record levels in May, increasing by 0.7% nationally compared to April at a seasonally adjusted rate, according to a report from Black Knight.
Due to the high mortgage rates, homeowners who locked in sub-3% bargain mortgage rates during the peak of the pandemic are now holding off on selling. This has resulted in a shortage of homes in relation to demand, driving up prices.
As of this past week, the average rate on a 30-year fixed-rate mortgage was 6.81%, the highest since November when rates skyrocketed above 7%, according to Freddie Mac.
Overall, the slowdown in annual inflation brings some relief and optimism for the Biden administration’s economic agenda. While challenges remain, such as the volatility in the banking sector and the impact of rising prices on households, there are also positive indicators like the red-hot labor market and the resurgence of the housing market.
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