Inflation cooled markedly last month, as revealed by the June Consumer Price Index (CPI) report. This development has increased the likelihood that the Federal Reserve might cut interest rates more than once before the end of the year, according to experts.
Key Takeaways
- Headline CPI: Declined 0.1% month-over-month, the first drop in 23 months.
- Annual CPI: Rose 3.0% in June, down from 3.4% in May.
- Core CPI: Excluding food and energy costs, rose just 0.1% in June.
- Federal Reserve: Increased probability of interest rate cuts, potentially starting in September.
Detailed Analysis
The U.S. Bureau of Labor Statistics reported that headline CPI fell by 0.1% month-over-month in June, marking the first decline in nearly two years. Economists had forecasted a 0.1% increase. On an annual basis, CPI rose 3.0% in June, down from 3.4% in May, beating estimates of a 3.1% gain. Core CPI, which excludes volatile food and energy prices, also surprised to the downside, rising just 0.1% compared to the previous month, against forecasts of a 0.2% increase.
Federal Reserve’s Stance
Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC) are looking for sustained evidence that inflation is moving towards their long-term target of 2% before cutting the federal funds rate. The latest CPI report adds a dovish data point to the Fed’s deliberations on interest rates.
George Mateyo, Chief Investment Officer at Key Wealth, noted, "Better than expected inflation readings in many key sectors should allow the Fed to start talking about adjusting policy in July and potentially act in September."
Market Reactions
As of July 11, futures traders assigned an 86% probability to the first quarter-point cut coming in September, up from 70% a day earlier, according to CME Group’s FedWatch Tool.
Expert Opinions
- Pete Tibbles, BOK Financial: "The CPI report showed that prices for the consumer are slowing. This will be welcome news for the Fed, although Chairman Powell did indicate there are risks to both sides of the economy."
- John Luke Tyner, Aptus Capital Advisors: "The inflation print today appears to prove the hot data to start the year was mostly an outlier. We imagine the Fed speak will turn more dovish, and the more promising data all but guarantees a September cut."
- Ian Shepherdson, Pantheon Macroeconomics: "June’s CPI data bring more evidence of broad-based disinflation, giving the Fed the green light to ease multiple times this year."
- Dann Ryan, Sincerus Advisory: "This CPI print below expectations will make the calls of the September doves pretty impossible to ignore."
- Elyse Ausenbaugh, J.P. Morgan Wealth Management: "This report supports that we’re getting close to the onset of Fed rate cuts. The risk narrative has become better balanced between inflation and a growth slowdown."
- Robert Conzo, The Wealth Alliance: "Part of the reason for this decline in inflation was that household consumption, construction spending, and the services sector inflation came in below analysts’ expectations."
- Ivan Gruhl, Avantax: "Today’s CPI report is a good scenario for the Fed and could help change Fed Chair Powell’s perspective."
- David Royal, Thrivent: "Despite today’s favorable CPI report, a rate cut at the Fed’s meeting on July 31 remains unlikely."
- Dawit Kebede, America’s Credit Unions: "June headline prices fell for the first time in over two years due to declines in energy and vehicle prices and substantial cooling in shelter price increase."
- Mike Cornacchioli, Citizens Private Wealth: "Overall, it’s a very positive report for the Fed, which increases the likelihood of rate cuts in the second half of the year."
- Clayton Allison, Prime Capital Investment Advisors: "The print this morning would be considered good data even by Powell’s standards."
- David Russell, TradeStation: "Given rising inventories in housing, this sizable component of the price index is finally starting to give the Fed what it needs to see for rate cuts."
- Eric Merlis, Citizens: "Combined with the weaker than expected June jobs report, today’s inflation reading builds a stronger case for a Fed rate cut in the coming months."
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