Inflation eased significantly last month, as revealed by the June Consumer Price Index (CPI), increasing the likelihood that the Federal Reserve might cut interest rates more than once before the year ends, experts say.
Prices dropped in June for the first time in nearly two years. The headline CPI decreased by 0.1% month-over-month, registering the first decline in 23 months, according to the U.S. Bureau of Labor Statistics. Economists had anticipated a 0.1% increase from May. On an annual basis, CPI rose 3.0% in June, down from 3.4% in the previous month, surpassing estimates of a 3.1% gain.
Core CPI, which excludes food and energy costs, also exceeded expectations, rising by just 0.1% in June compared to the previous month. Projections had called for a 0.2% increase.
Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC) are searching for sustained evidence that inflation is moving toward the long-term target of 2% before considering a reduction in the federal funds rate, which is currently at a 23-year high. The latest CPI report provides a dovish data point for the Fed’s interest rate discussions, according to experts.
“Better than expected inflation readings in many key sectors should allow the Fed to start discussing policy adjustments in July and possibly take action in September,” says George Mateyo, chief investment officer at Key Wealth. “In particular, housing, which has been high, showed some moderation. However, we believe the Fed will seek further confidence before making aggressive cuts unless there is labor market strain.”
As of July 11, futures traders assigned an 86% probability to the first quarter-point cut happening in September, up from 70% the previous day, as indicated by CME Group’s FedWatch Tool.
Here are some expert views on the June CPI report:
“The CPI report showed consumer prices are slowing. The headline CPI month-over-month reported a -0.1% decline, the first in 23 months. This was below the forecasted 0.1%. This will be welcomed by the Fed, although Chair Powell indicated risks to both sides of the economy. The threat of inflation has been the main focus for global banks, including the Fed. However, with restrictive interest rates, the Fed must avoid stifling growth and pushing the economy into a recession,” says Pete Tibbles, senior vice president at BOK Financial.
“The inflation print today suggests the hot data at the start of the year was mainly an outlier. It appears we’ve resumed the disinflationary trend – great news for the Fed. As economic data slows, implications pass through to cost measures and the labor market, where unemployment is drifting higher. We imagine the Fed’s tone will become more dovish, and the promising data virtually guarantees a September cut. We wouldn’t be surprised if the Fed made a quarter-point cut in July,” says John Luke Tyner, portfolio manager at Aptus Capital Advisors.
“Widespread disinflation; the Fed will cut soon. June’s CPI data offer more evidence of broad-based disinflation, giving the Fed the green light for multiple cuts this year. Prices for core services minus rents were unchanged for the second straight month. Labor market slack is building, dragging on wage growth and new rent increases, while retailers face growing pressure from budget-conscious consumers. We expect 1.25 percentage points of easing this year, starting in September with a quarter-point cut,” says Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics.
“Jerome Powell did his best Kobe Bryant impression this week, declaring the ‘job’s not finished’ on inflation. However, this CPI below expectations will make the calls of the September doves hard to ignore. With the labor market no longer a source of inflationary pressure, markets will likely turn to employment data. Any softening will amplify September noise,” says Dann Ryan, managing partner at Sincerus Advisory.
“This report indicates we’re nearing the start of Fed rate cuts. The risk narrative has become more balanced between inflation and growth slowdown, and June data showed a normalizing labor market and cooling price pressures. The soft landing remains in sight. Investors should consider extending duration, and we see potential for stocks to continue setting new record highs ahead. The upcoming earnings season will need to validate this optimism,” says Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management.
“Part of the inflation decline was due to household consumption, construction spending, and service sector inflation coming in below expectations. Rent costs also rose only 0.3%, the smallest increase in almost three years. Recent comments from Jerome Powell suggest he recognizes the economy is slowing, setting up for a September rate cut. Although a September cut seems more likely, we still have two more inflation reports before the meeting,” says Robert Conzo, CEO and managing director at The Wealth Alliance.
“Today’s CPI report suggests inflation is receding sharply. The smallest core inflation reading since April 2021 and the lowest ‘super core’ inflation in nearly three years boost confidence in the disinflation trend. The committee should feel confident that rate cuts should begin in September,” says Ivan Gruhl, co-chief investment officer at Avantax.
“Today’s data signal to the Fed that inflation is indeed coming down after several hot months earlier this year. Despite this favorable CPI report, a rate cut in July remains unlikely. If inflation stays low, we anticipate a rate cut in September. We see an economy weakening but not at imminent recession risk. This report supports both equities and bonds,” says David Royal, chief financial and investment officer at Thrivent.
“June’s headline prices fell for the first time in over two years due to declines in energy and vehicle prices and significant cooling in shelter price increases. This news, combined with the labor market’s moderation last week, supports more relaxation on monetary policy. Given the trend in the past two months, the likelihood of two rate cuts this year increases,” says Dawit Kebede, senior economist at America’s Credit Unions.
“This inflation report was better than expected, showing a decline driven by lower energy costs. Core inflation posted its smallest monthly gain since August 2021, aided by slower shelter growth and lower auto prices. While CPI readings remain high relative to the Fed’s 2% target, they have sharply declined and are heading in the right direction. This report increases the likelihood of rate cuts in the latter half of the year, with the September FOMC meeting now firmly in place,” says Mike Cornacchioli, senior vice president for investment strategy at Citizens Private Wealth.
“Powell has been careful to leave the Fed’s options open concerning rate decisions. He has refused to indicate future cuts or hikes but has stated he wants to see more good data to gain confidence that inflation is moving towards 2% before cutting rates. The print this morning would likely be considered positive data by Powell’s standards. The cooling labor market and the CPI report suggest the likelihood of future rate cuts. The Fed relies on broader data, but this CPI report is indicative of a larger disinflation trend,” says Clayton Allison, portfolio manager at Prime Capital Investment Advisors.
“Shelter softening in June, matched with rising housing inventories, finally provides the Fed with what it needs to see for rate cuts. A September cut looks more likely than ever,” says David Russell, global head of market strategy at TradeStation.
“Combined with the weaker-than-expected June jobs report, today’s inflation reading strengthens the case for a Fed rate cut in the coming months. While unlikely at the July meeting, if the trends of a weakening labor market and lower inflation continue, a September rate cut is firmly on the table,” says Eric Merlis, managing director and co-head of global markets at Citizens.