The latest US inflation numbers came out yesterday. The consumer price index fell to 3 per cent in June, which is a full per cent lower than it was in May. The cooler inflation report caused the S&P 500 to jump and Treasury yields to drop. I’m joined now by the FT’s US economics editor Colby Smith to talk more about the ins and outs of the report. Hey, Colby.

Colby Smith

Hi, Marc.

Marc Filippino

On the surface, it would seem like we got an encouraging inflation report yesterday. How would you describe it?

Colby Smith

I think both on the surface and when you look beneath the hood, this is a good inflation report. And speaking to various economists, it was tough to find points of concern in this reading. I think the big question, though, is whether this is the start, you know, of a string of more subdued inflation prints or if this is perhaps just a one-off and not necessarily a sign that the inflation problem is fully behind us.

Marc Filippino

Was there a lot of concern over the strength of core inflation, inflation that strips out things that are more volatile like food prices and energy prices?

Colby Smith

Yeah, core inflation has always been what policymakers and economists have focused most directly on, just because that’s seen as the best kind of indicator of where inflation is going from here on out. That’s still relatively high when you think about the annual pace. But if you look at the monthly gain in particular, it was only 0.2 per cent in June, and that’s the smallest increase in nearly two years. And in speaking to an economist about the kind of trend going forward, the expectation is that not only for June but for July, August and September, we can expect core inflation to steady at that level.

Marc Filippino

So Colby, do we have a sense of how this report could affect the way the Federal Reserve approaches interest rates?

Colby Smith

So that’s really the big question that I think economists are grappling with. We know that a July interest rate increase, you know, at their meeting at the end of the month is quite likely. I think the big question now is what happens after that point. There’s a lot of speculation that the Fed could very well be done with the tightening cycle. It’s squeezed the economy sufficiently to get inflation back down to 2 per cent, and it doesn’t need to do anything further. Regardless of where the Fed shakes out, we’re likely to see them keep the door open to further interest rate increases at the next meeting just because they don’t want to tie their hands.

Marc Filippino

Colby Smith is the FT’s US economics editor. Thanks, Colby.

Colby Smith

Thanks, Marc.