Inflation Eased In June, Helping Fed's Warsh Delay Potential Rate Hikes

Federal Reserve Chair Kevin Warsh got a reprieve Tuesday when the government reported a steep drop in inflation last month driven by lower gas prices, which will take some of the pressure off the central bank to quickly raise interest rates.

The consumer price index fell 0.4 percent in June, its largest decrease since the depths of the pandemic in April 2020, as falling energy costs offset price increases in other areas like housing and food. Inflation in services industries beyond energy was also flat, an encouraging trend.

But it’s difficult to predict whether this improved picture will hold, particularly since the U.S. has restarted hostilities with Iran, prompting oil prices to once again surge.

“This is welcome news for the Fed, but it is hardly mission accomplished,” Inflation Insights President Omair Sharif said in a note to clients.

Warsh is set to face questions Tuesday from House lawmakers about how the Fed will handle inflation, which has been rising much faster than the central bank’s 2 percent target. CPI increased 3.5 percent over the last 12 months, a decline from the 4.2 percent annual rate reported in May, according to the latest data.

The Fed chair isn’t expected to provide much in the way of specifics — he has made it a habit in his early tenure to avoid commenting on the outlook for the economy and interest rates — but in his opening statement, he will reaffirm his commitment to getting inflation back down.

“While monthly price fluctuations are inevitable—especially in an unsettled world—underlying inflation over longer time horizons is determined largely by monetary policy,” according to his prepared opening statement. “The members of our [rate-setting] Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability.”

Fed officials are eyeing the possibility of rate hikes later this year if inflation does not continue to ease, according to the minutes from their June meeting. Fed board member Christopher Waller suggested on Monday that he might consider increasing rates as soon as this month if the inflation data came in hot, but Tuesday’s better-than-expected news should help keep the Fed on hold for the time being.