Inflation eased significantly last month, as revealed by the June Consumer Price Index (CPI) released Thursday, increasing the likelihood that the Federal Reserve might reduce interest rates more than once by year-end, according to experts.
Prices experienced a decline in June for the first time in nearly two years. The headline CPI dropped 0.1% month-over-month, marking the first decrease in 23 months, as reported by the U.S. Bureau of Labor Statistics. Economists had predicted a 0.1% increase from May. Year-over-year, CPI rose 3.0% in June, down from 3.4% in May, surpassing the estimated 3.1% gain.
Core CPI, which excludes volatile food and energy prices, also surprised by rising only 0.1% in June compared to the previous month. Forecasts had predicted a 0.2% increase.
Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) seek to see sustained evidence that inflation is moving towards their long-term target of 2% before reducing the federal funds rate from its current 23-year high. The latest CPI report provides crucial data for the Fed’s decision-making on interest rates, according to experts.
“Better than expected inflation readings in several key sectors might enable the Fed to start discussing policy adjustments in July and potentially act by September,” says George Mateyo, chief investment officer at Key Wealth. “Particularly notable is the moderation in housing, which had been elevated. However, the Fed may still seek more confidence before cutting rates aggressively unless there is stress in the labor market.”
As of July 11, futures traders estimated an 86% probability of the first quarter-point rate cut in September, up from 70% the previous day, according to CME Group’s FedWatch Tool.
With the June CPI report now public data, we turned to economists, strategists, and other experts for their insights on the implications for markets, macroeconomics, and monetary policy. Below is a selection of their commentary, sometimes edited for brevity or clarity.
Expert Opinions on the CPI Report
“The CPI report showed that consumer prices are slowing. The headline CPI month-over-month reported a price decline for the first time in 23 months at -0.1%, lower than the forecasted 0.1%. This is welcome news for the Fed, although Chairman Powell mentioned potential economic risks in his remarks to Congress on Tuesday. With current restrictive interest rates, the Fed must balance inflation threats and avoid stifling growth, potentially leading to a recession.” – Pete Tibbles, senior vice president, BOK Financial
“The inflation data today suggests that the hot data at the beginning of the year was mostly an outlier, and disinflationary trends are resuming – good news for the Fed. As economic data continues to slow, impacts are evident in cost measures and the labor market where the unemployment rate is rising. We predict the Fed will take a more dovish stance, and today’s promising data practically ensures a September rate cut. A quarter-point cut in July wouldn’t surprise us.” – John Luke Tyner, portfolio manager at Aptus Capital Advisors
“June’s CPI data offer more evidence of broad-based disinflation, giving the Fed the green light to ease interest rates multiple times this year. Prices for core services excluding rents were unchanged for the second straight month. Conditions seem favorable for further CPI declines in the latter half of the year. A weakening labor market and price pressures from budget-conscious consumers might prompt the FOMC to cut rates quickly in response to economic stresses. We expect 1.25 percentage points of rate cuts this year, beginning with a quarter-point cut in September.” – Ian Shepherdson, chairman, Pantheon Macroeconomics
“Jerome Powell’s recent statements, resembling Kobe Bryant’s ‘job’s not finished’ mentality about inflation, may become hard to avoid after the below-expectations CPI report. With the labor market no longer a major inflationary force, the focus may shift to employment data where any softening will likely amplify calls for a September cut.” – Dann Ryan, managing partner at Sincerus Advisory
“This report indicates a near onset of Fed rate cuts. The narrative between inflation and growth slowdown has become more balanced, and June data shows a normalizing labor market and cooling prices. The soft landing appears achievable. Investors holding excess cash may need to reconsider their position, and there is potential for stocks to hit new record highs in the coming year. Focus now shifts to earnings season to confirm this optimism.” – Elyse Ausenbaugh, head of investment strategy, J.P. Morgan Wealth Management
“Part of the inflation decline resulted from household consumption, construction spending, and the services sector falling short of expectations. Rent costs rose just 0.3% in June – the smallest increase in almost three years. Powell’s last remarks indicated a need for more encouraging economic data before rate cuts. Though a September rate cut seems more likely now, we still have two more inflation reports before that meeting, and anything can happen.” – Robert Conzo, CEO, The Wealth Alliance
“Today’s CPI report could change Fed Chair Powell’s perspective on inflation. The core reading at 3.3% was the smallest since April 2021, and ‘super core’ inflation was the lowest in nearly three years. This gives confidence to the committee that rate cuts should begin in September.” – Ivan Gruhl, co-chief investment officer, Avantax
“Despite today’s favorable CPI report, a rate cut at the July 31 meeting remains unlikely. Barring a significant inflation uptick in July or August, a rate cut in September seems probable. The economy, while weakening, is not in imminent recession risk. June’s report should support both equities and bonds.” – David Royal, chief financial and investment officer, Thrivent
“June’s decline in headline prices, driven by lower energy and vehicle prices and a cooling shelter market, complements recent labor market moderation, suggesting more monetary policy relaxation sooner than anticipated. If current inflation trends continue, the likelihood of two rate cuts this year increases.” – Dawit Kebede, senior economist, America’s Credit Unions
“Today’s inflation report was better than expected, with a decline in headline inflation due to lower energy costs. Core inflation also posted the smallest monthly gain since August 2021. Overall, this positive report increases the likelihood of rate cuts in the second half of the year, especially by the September FOMC meeting.” – Mike Cornacchioli, senior vice president, Citizens Private Wealth
“Chair Powell has kept Fed options open regarding rate decisions and seeks more positive data. Today’s CPI data seem to meet Powell’s standards and, combined with labor market cooling, increase the odds of future rate cuts. The Fed doesn’t base decisions solely on the CPI report but will consider Core PCE data and other forthcoming reports. If the disinflation trend continues, multiple rate cuts in the latter part of the year are possible.” – Clayton Allison, portfolio manager, Prime Capital Investment Advisors
“Investors have awaited a softening in shelter costs, which they observed in June. With rising housing inventories, this CPI component is finally showing favorable signs for rate cuts. September looks increasingly likely for a rate reduction.” – David Russell, global head of market strategy, TradeStation
“Combined with the weaker 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 labor market and inflation trends continue to weaken, a rate cut at the September FOMC is likely.” – Eric Merlis, managing director, Citizens