June CPI Report to Shape Future Fed Interest Rate Decisions


On Thursday, investors eagerly anticipate the release of June’s Consumer Price Index (CPI), a crucial data point that will influence future Federal Reserve interest rate policy. Set to be unveiled at 8:30 a.m. ET, the CPI is projected to show a headline inflation rate of 3.1%, a decrease from the 3.3% rise seen in May. This would mark the smallest annual increase since January, potentially driven by another drop in energy prices that could further ease headline CPI.

For the previous month, consumer prices are predicted to have increased by 0.1%, slightly up from May’s stagnation. On a core basis, which excludes the volatile prices of food and gas, prices in June are expected to have risen 3.4% year over year and 0.2% from the previous month, according to Bloomberg data, consistent with May’s figures. “We expect the June CPI report to be another confidence builder following the undeniably good May report,” stated Bank of America economists Stephen Juneau and Michael Gapen in a recent note. They added that while the anticipated figures are “not quite as low as May, it would be a good print for the Fed.”

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Thursday’s inflation data is critical for the Federal Reserve, which is contending with slowing job market growth and recent statements from Fed Chair Jay Powell, both of which have kept hopes for rate cuts alive. Powell, wrapping up his semiannual policy update to Congress on Wednesday, has adhered to a data-dependent approach—a positive sign given the recent encouraging data. Addressing the Senate Banking Committee, he acknowledged evidence of cooling inflation but emphasized the need for more “good data” to confirm a shift toward the Fed’s 2% inflation target.

Stubbornly elevated core inflation, attributed to higher costs of shelter and core services like insurance and medical care, remains a concern. In May, non-housing services experienced an unexpected decline, largely due to a slight drop in motor vehicle insurance, as noted by Juneau and Gapen. However, the economists foresee a potential increase in the services category, including motor vehicle insurance, in June, indicating a “bumpy” path toward price stabilization.

Although non-housing services inflation is expected to moderate over time due to cooling service wages, a prolonged deflation period is unlikely. Meanwhile, rent and owners’ equivalent rent, which refers to the hypothetical rent a homeowner would pay, are predicted to cool in upcoming months, which should bolster the Fed’s confidence in the inflation outlook. The Goldman Sachs team, led by Jan Hatzius, also sees potential for “further disinflation” this year, citing rebalancing in the auto, housing rental, and labor markets. However, they caution against continued upward pressure from healthcare, car insurance, and single-family rent growth outpacing multifamily rents.

Goldman projects year-over-year core CPI inflation to be 3.2% and core PCE inflation to be 2.7% in December 2024, down from previous estimates of 3.5% and 2.8%, respectively. Despite stubbornly high inflation above the Federal Reserve’s 2% target, recent economic data has fueled discussions about the necessity of rate cuts. Last Friday, the Bureau of Labor Statistics reported an increase of 206,000 nonfarm payroll jobs in June, surpassing the expected 190,000-plus, though the unemployment rate rose to 4.1%, the highest in almost three years.

Notably, the Fed’s favored inflation measure, the core PCE price index, showed easing inflation in May, with a year-over-year change of 2.6%—the slowest annual gain in more than three years and in line with estimates. Bank of America suggests that if the upcoming CPI report aligns with expectations, the Fed may commence a rate-cutting cycle in December. However, they note that another 0.2% month-over-month rise in core CPI could prompt an earlier cut, given signs of softening economic activity.

Investor expectations have shifted, now anticipating one to two 25-basis-point cuts in 2024, down from six cuts forecasted at the beginning of the year, according to Bloomberg data. As of Wednesday, market data from CME Group indicated a roughly 75% likelihood that the Federal Reserve will begin lowering rates at its September meeting.