Consumer price index data for June revealed that core inflation cooled more than anticipated last month as services inflation, including housing costs, eased. The S&P 500 reversed its earlier gains, suggesting that the robust bull market may pause. Meanwhile, Treasury yields dropped as Wall Street welcomed the implications for potential Federal Reserve rate cuts.
CPI Inflation Report Performance
The overall consumer price index unexpectedly decreased by 0.1% for the month, contrary to predictions of a 0.1% increase. The annual CPI inflation rate fell to 3% from May’s 3.3%.
The core CPI, which excludes volatile food and energy prices, rose by just 0.1% compared to the 0.2% forecast. The 12-month core CPI inflation rate dropped to 3.3% from 3.4% in May, lower than the anticipated 3.5%. This represents the smallest increase since January 2021.
Goods prices fell by 0.1% for the month and 1.8% year-over-year. New vehicle prices decreased by 0.2% from May and 0.9% from June 2023, marking the largest annual decline since May 2018.
Core services prices increased by just 0.1%, the smallest rise since August 2021, following May’s 0.2% increase.
Overall shelter costs increased by 0.2%, with hotel and motel rates dropping by 2.5%. In contrast, primary rent and owner’s equivalent rent rose by 0.3%, the smallest climb since August 2021.
Transportation services prices decreased by 0.5% for the second consecutive month, with airline fares declining by 5%.
Jobless Claims
Initial jobless claims unexpectedly fell to 222,000 in the week of July 6 from a revised 239,000 the previous week. However, July and early August data are often viewed cautiously by economists due to seasonal adjustments affected by the July 4 holiday, school summer breaks, and auto-factory retooling.
CPI Vs. PCE Inflation
It’s important to note that the Fed’s primary inflation measure, the core PCE price index, often increases more slowly than the core CPI. In May, the core CPI rose by 0.16%, whereas the core PCE price index edged up by just 0.08%, the smallest increase since November 2020.
A significant reason for this difference is that housing costs, which have been rising more quickly than core inflation, make up 43% of the core CPI basket but less than 18% of core PCE outlays.
CPI data provides around 70% of the PCE price index components, with the remainder coming from the producer price index, including healthcare prices. Upcoming PPI data will help economists refine their estimates for June’s core PCE price index, which is set for release on July 26.
According to Ian Shepherdson, chief economist at Pantheon Macroeconomics, a 0.17% increase in the core PCE price index for June is tentatively expected based on the CPI data.
Prices for food away from home rose by 0.4% in June, one of the categories still experiencing elevated inflation. Though not part of the core CPI, food services are included in the core PCE price index.
Fed Chair Powell Turns More Dovish
Federal Reserve Chairman Jerome Powell told the Senate banking panel that the labor market “appears to be fully back in balance,” lowering the threshold for interest-rate cuts. Powell indicated that the labor market had cooled “significantly across so many measures.”
Since late 2022, Powell has emphasized that inflation in nonhousing services is crucial to the interest-rate outlook, due to the high percentage of wages in service businesses’ costs. However, he stated that the labor market no longer significantly contributes to inflationary pressures in the economy.
Following Powell’s dovish comments at a European Central Bank forum, he noted, “We are getting back on a disinflationary path,” while cautioning that further good inflation data is needed.
Fed Rate-Cut Outlook
After the CPI data, markets predict a 93% likelihood of a rate cut by the Federal Reserve’s Sept. 18 meeting, up from 71% before the data. There are now 91.5% odds of two quarter-point rate cuts before year-end, up from 74%.
The probability of a third quarter-point rate cut this year rose to 48% from 27.5%.
Powell has indicated that an unexpected weakening of the labor market would increase the urgency to lower interest rates from restrictive levels. His assessment that the labor market remains “strong” suggests no imminent cuts just yet. However, any further cooling could accelerate Fed rate-cutting.
S&P 500
Initially, the S&P 500 climbed after the June CPI data but later dropped 0.9% in Thursday’s trading. The index gained 1% on Wednesday, marking the largest increase of its seven-day streak. The S&P 500 has reached a record high 37 times this year, climbing 17.1% so far in 2024.
The 10-year Treasury yield fell by eight basis points to 4.20%, near a four-month low.
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