US inflation hits a two-year low, signaling the end of the inflation cycle, but persistent core inflation remains a concern.
On July 9th, Nick Timiraos, a journalist known as the &#34;New Fed Wire&#34; of The Wall Street Journal, pointed out that as efforts to lower inflation have reached the &#34;last mile,&#34; progress may stall because only an economic recession can truly slow down core inflation.
Earlier, data from the US Bureau of Labor Statistics showed that US CPI rose 4% year-on-year in May, marking the 11th consecutive decline and the smallest year-on-year increase since March 2021. At the same time, core CPI rose 5.3% year-on-year, lower than the previous value of 5.5%, and the lowest since November 2021, but still higher than the expected 5.2%.
Timiraos believes that the decline in inflation for housing and used cars will help improve inflation, but if the economy continues to grow, it will be difficult to further reduce the inflation rate from its current level to the Fed's target of 2%. This may force the Fed to maintain a tight monetary policy before the labor market weakens:
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Compared with reducing the inflation rate from 9% to 3% to 4%, it may be more challenging to reach the last mile of 2% if economic activity remains stable.
UBS expects the core personal consumption expenditure inflation rate to drop to 3.3% this year and 1.6% next year, but the premise is that the economy will enter a recession later this year.
So far, there are no signs of that.
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Timiraos pointed out that over the past two years, many forecasters believed that core inflation would decline as the reversal of rising prices for special commodities, but they later found that other inflation emerged:
<blockquote>
It's like playing whack-a-mole.
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One of the main reasons for persistent core inflation is wage inflation, which is the upward pressure on wages caused by the still tight labor market:
<blockquote>
In May, there were 1.6 job openings for every unemployed person, lower than the peak of 2 last year but higher than the pre-pandemic level of 1.2, indicating that the imbalance between labor supply and demand continues.
Average hourly wages in June increased by 0.4% compared to May, with an annualized growth rate of 4.7% over the past three months, higher than the level that Fed officials believe is consistent with a 2% inflation rate.
</blockquote>
Timiraos said that the hot job market poses challenges to reducing inflation:
<blockquote>
If the economy does not slow down, wage growth may remain high, supporting stronger demand for goods and services, thereby boosting demand for labor.
If consumers feel secure in their jobs, they will continue to consume, making it more difficult to lower inflation.
</blockquote>

The job market is difficult to cool down, creating stubborn core inflation.

New Fed Communication Agency: US inflation becomes increasingly difficult to lower as time goes on.