Is America’s inflationary fever breaking?

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Writing out economic figures to the third decimal place is normally an exercise in spurious precision. But after two years of uncomfortably high inflation, price statistics are studied in minute detail. The unrounded month-on-month increase in America’s core inflation (minus volatile food and energy costs) in June was 0.158%, even more pleasing for officials than the 0.2% rounded increase, which itself was the slowest pace in more than two years. However many decimal places, the question remains the same. Is America’s inflationary fever finally breaking?

The latest figures brought much good news. Headlines focused on the deceleration in the overall consumer-price index: just a 3% year-on-year rise in June, a sharp slow down from the 9% pace of June 2022, thanks largely to a fall in energy prices. Yet a range of measures of underlying inflation also looked appealing. Most notably, prices for core services excluding housing—a category to which Jerome Powell, chairman of the Federal Reserve, often points as an indicator of underlying inflationary momentum—fell slightly in June compared with May.

On its own, such a benign inflation report might be expected to push the central bank to hold interest rates steady when it next meets, at the end of July. It is, however, never wise to read too much into a single month of data. The Fed’s policymakers have much else to factor into their decision, starting with the labour market. And a range of indicators highlight its remarkable resilience.

For every unemployed person in America, there are 1.6 jobs available, a ratio down a tad since mid-2022, but well in excess of the pre-pandemic norm. Since February 2020 the economy has added nearly 4m jobs, putting employment above its long-term trend line. Some 84% of prime-age workers are now in work or looking for work, the most since 2002 and just a percentage point off an all-time high.

From the view of workers, such vigour is welcome. Wage growth has been fast for service-sector jobs that require less education, such as construction. This, in turn, has helped narrow income inequality. Less well-off folk benefit from a tight labour market. The unemployment rate for black Americans hit 4.7% in April, a record low.

But will this tightness in the labour market feed through into broader price rises? Hourly earnings in June, for instance, rose at an annualised pace of 4.4%, consistent with an inflation rate well above the Federal Reserve’s target of 2%. Alternative measures suggest that the upward trend may be even steeper. A tracker by the Fed’s Atlanta branch points to annualised wage growth of around 6% this year.

As a result, despite the recent cooling in inflation, the hot employment picture all but guarantees the Fed will resume lifting rates after a brief pause last month. Markets now assign a 92% probability to a quarter-point rate rise in July; a month ago it was more or less seen as a coin flip.

Less certain is what the Fed will do after that. Before the inflation data for June, Mr Powell and many of his colleagues indicated the central bank would provide yet another rate increase before the end of this year. This is now in doubt. If inflation recedes again in July and August, the central bank will come under extreme pressure to call time on its tightening cycle. Three decimal places will not lead it to stop. But three consecutive soft inflation reports ought to do the trick.

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