June CPI Report to Shape Future Fed Interest Rate Cuts

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On Thursday, investors will digest one of the most critical data points shaping future Federal Reserve interest rate policy: June’s Consumer Price Index (CPI). The inflation report, scheduled for release at 8:30 a.m. ET, is expected to show headline inflation of 3.1%, down from the 3.3% rise seen in May. This would mark the smallest annual increase since January, likely driven by another drop in energy prices.

Consumer prices over the prior month are anticipated to have risen 0.1%, a slight increase from May’s flat monthly reading. On a “core” basis, which excludes the more volatile costs of food and gas, prices in June are projected to have risen 3.4% over last year and 0.2% over the previous month, unchanged from May, according to Bloomberg data.

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Bank of America economists Stephen Juneau and Michael Gapen noted in a recent statement that they expect the June CPI report to be another confidence booster following the positive May data. They stated that the anticipated numbers, while not quite as low as May, would still be favorable for the Federal Reserve.

Thursday’s inflation data comes at a crucial time for the central bank. Slowing job market growth, along with recent testimony from Federal Reserve Chair Jay Powell, have kept hopes for a rate cut alive. Powell, concluding his semiannual policy update to Congress on Wednesday, has maintained a data-dependent stance, which is a promising sign given the recent positive data. On Tuesday, he told the Senate Banking Committee that despite evidence of cooler inflation, the Fed still requires more “good data” to be confident that inflation is moving toward its 2% target.

Core inflation has remained stubbornly high due to rising costs of shelter and core services such as insurance and medical care. In May, non-housing services “surprisingly edged down,” largely due to a slight decline in motor vehicle insurance, according to Bank of America’s Juneau and Gapen. However, the economists expect the services category, including motor vehicle insurance, to have increased in June, highlighting the “bumpy” road ahead in stabilizing prices.

They warned that while non-housing services inflation should moderate over time given cooling services wage inflation, a sustained period of deflation is unlikely.