On Thursday, investors will digest one of the most important data points that will shape future Federal Reserve interest rate policy: June’s Consumer Price Index (CPI).
The inflation report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.1%, a deceleration from the 3.3% rise seen in May. This would be the smallest annual rise since January as another drop in energy prices likely will have contributed to further downward pressure on headline CPI.
Over the prior month, consumer prices are expected to have risen 0.1%, a slight uptick from May’s flat monthly reading.
Meanwhile, on a “core” basis, which strips out the more volatile costs of food and gas, prices in June are expected to have risen 3.4% over last year and 0.2% over the prior month, unchanged from May, according to Bloomberg data.
“We expect the June CPI report to be another confidence builder following the undeniably good May report,” Bank of America economists Stephen Juneau and and Michael Gapen wrote in a note last week.
The economists said while the anticipated numbers are “not quite as low as May, it would be a good print for the Fed.”
Thursday’s inflation data arrives at a critical moment for the central bank after slowing job market growth, coupled with recent testimony from Federal Reserve chair Jay Powell, have kept rate cut hopes alive.
Powell, who is set to complete his semiannual policy update to Congress on Wednesday, has largely stuck to his data-dependent narrative — a positive sign given recent encouraging data. On Tuesday, he told the Senate Banking Committee that although there’s been evidence of inflation cooling, the Fed still needs more “good data” to be confident that inflation is moving toward the Fed’s 2% target.
Core inflation has remained stubbornly elevated due to higher costs of shelter and core services like insurance and medical care. In May, non-housing services “surprisingly edged down in May, owing in large part to a slight decline in motor vehicle insurance,” Bank of America’s Juneau and Gapen noted.
But the economists expect the category (and motor vehicle insurance) to have increased in June, indicative of the “bumpy” path forward when it comes to price stabilization.
“Non-housing services inflation should moderate over time given cooling services wage inflation; however, a sustained period of deflation is unlikely,” they warned.
Meanwhile, price increases for rent and owners’ equivalent rent, or the hypothetical rent a homeowner would pay for the same property, are expected to cool in the coming months, BofA said, “which should add to the Fed’s confidence on the inflation outlook.”
The team at Goldman Sachs, led by Jan Hatzius, agreed “further disinflation” remains in the pipeline this year, citing “rebalancing in the auto, housing rental, and labor markets.”
Still, “we expect offsets from continued catch-up inflation in healthcare and car insurance and from single-family rent growth continuing to outpace multifamily rent growth.”
Goldman anticipates year-over-year core CPI inflation of 3.2% and core PCE inflation of 2.7% in December 2024, down from their previous projection of 3.5% and 2.8%, respectively.
To cut or not to cut?
Inflation has remained stubbornly above the Federal Reserve’s 2% target on an annual basis. But recent economic data has helped fuel a narrative that the central bank should cut rates sooner than later.
On Friday, the Bureau of Labor Statistics showed the labor market added 206,000 nonfarm payroll jobs last month, ahead of the 190,000-plus expected by economists. However, the unemployment rate unexpectedly rose to 4.1%, up from 4% in the month prior. It was the highest reading in almost three years.
Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, showed inflation eased in May. The year-over-year change in core PCE came in at 2.6% over the prior year in May, in line with estimates and the slowest annual gain in more than three years.
“Should the CPI report print [fall] in line with our expectations, we would maintain our expectation for the Fed to start its cutting cycle in December.” BofA said. “That said, we do acknowledge that another 0.2% month-over-month print for core CPI would tilt the risk towards an earlier cut especially given signs of softening activity.”
Investors now anticipate a range of one to two 25-basis-point cuts in 2024, down from the six cuts expected at the start of the year, according to Bloomberg data.
As of Wednesday, markets were pricing in a roughly 75% chance the Federal Reserve begins to cut rates at its September meeting, according to data from the CME Group.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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