June’s Consumer Price Index Report Released – Here’s What It Means for Your 401(k)

Wednesday was a big day for Americans looking to buy a home or keep an eye on their 401(k)s — as a rare double-header of economic news emerged.

A consumer price index (CPI) update this morning showed that inflation is cooling. The annual CPI for May was 3.3 percent, lower than the April rate.

While prices are still rising, they are doing so at a much lower rate than expected – which is a boost to the economy. Most experts thought the CPI would be 3.5 percent.

Cheaper gas and declining car insurance — after the biggest price increase since the 1970s — helped.

Lower inflation numbers sent stocks soaring. The tech-heavy S&P 500 and Nasdaq 100 both hit record highs. Other stocks rose as well — boosting retirement accounts.

Then, at 2pm, the Federal Reserve revealed – as expected – that it had kept interest rates unchanged between 5.25 and 5.50 percent.

The S&P 500 rose immediately after the inflation data dropped at 8:30 a.m. ET — and then stayed up throughout the day.  It closed above 5,400 for the first time.

The S&P 500 rose immediately after the inflation data dropped at 8:30 a.m. ET — and then stayed up throughout the day. It closed above 5,400 for the first time.

CPI - the main measure of US inflation - cooled to 3.3% in May from a year ago.  It was 3.4% in May

CPI – the main measure of US inflation – cooled to 3.3% in May from a year ago. It was 3.4% in May

Cooling inflation means more than just falling prices for Americans.

It gives Fed officials the green light to consider cutting interest rates — and doing so lowers borrowing costs for consumers and businesses.

It means that mortgage rates fall, and a decrease in credit card rates and the cost of car loans. This frees up money for Americans to spend, which is good for businesses

Lower rates are good for businesses in another way, too. They make it cheaper for them to borrow and grow their business.

All of the above means Wall Street likes lower fees — and that means stock prices, and 401(K)s, go up.

After the inflation numbers came out at 8:30 a.m., markets raised expectations for an early September rate cut.

They rated a chance above 70 percent, according to CME’s FedWatch tool, up from 54 percent before the report.

But the tone of what Jerome Powell said at 2:30 p.m. gave further clues about how quickly the rate will be cut.

Powell welcomed the inflation data but added that the US central bank needs to see more ‘good inflation readings’ before it gains enough confidence to consider cutting interest rates.

That means the US may only get one rate cut this year. The stock market was flat and the S&P 500 finished above 5,400 for the first time.

Sam Stovall, chief investment strategist at CFRA Research, said: “It certainly looks like trend inflation continues to be our friend.”

It was the seventh consecutive time the Fed has kept rates at that level.

Inflation must cool in order for the Fed to lower interest rates. Higher rates curb consumer spending – and lower demand for goods causes prices to fall.

Wall Street has been steady ahead of a busy week of inflation reports and the Federal Reserve's latest interest rate policy decision

Wall Street has been steady ahead of a busy week of inflation reports and the Federal Reserve’s latest interest rate policy decision

The Fed wants the annual inflation rate to drop to 2 percent.

Bret Kenwell, US investment analyst at eToro, said: “With a lower-than-expected CPI report this morning, investors are waiting to see how the Fed will impact markets later this afternoon.

“Cool inflation numbers should boost investor confidence for a Fed rate cut in the second half of 2024, but will the Fed pour gasoline or cold water on the fire when it comes to rate cuts? ?”

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