CPI Cools to 3% Annual Rate; Progress on Core Data; Prices Fell on Monthly Basis in June

With three inflation prints, including Thursday’s report, before the Fed’s September policy meeting, the June inflation data provided a “pivotal” piece of the puzzle to determining the path of potential rate cuts this year, writes Lindsay Rosner, head of multi-sector investing within Goldman Sachs Asset Management.

Thursday’s positive inflation report comes on the heels of the June employment data last week that showed continued moderation within the U.S. labor market. The unemployment rate ticked up to 4.1%—lending more support to the argument that rate cuts are due. The odds of a September rate cut rose to 83% following Thursday’s inflation report, up from just 70% on Wednesday, according to the CME FedWatch tool.

And boy did this report deliver. The June data beat expectations on nearly every front, with headline inflation experiencing an outright decline of 0.1% on a monthly basis—something not seen since the early days of the pandemic. On an annual basis, headline inflation slowed to a 3% pace, from 3.3% in May.

As Glenmede’s Jason Pride puts it: “If CPI had a voice, it would be singing, ‘allow me to reintroduce myself, my name is deflation.’”

Moreover, core inflation continued to show cooling. This gauge, which excludes the more volatile energy and food prices, is a necessary component in convincing Fed officials that the trajectory of price growth is sustainably heading back down. Core CPI was up 0.1% month-over-month in June, a slower pace than economists had expected.

“The smallest gain in core CPI since 2021 surely gives the Fed confidence that [the first quarter’s] hot CPI readings were a bump in the road, and builds momentum for multiple rate cuts this year,” writes Seema Shah, chief global strategist with Principal Asset Management.

The pace of core inflation was 3.3% year-over-year last month, easing from the 3.4% rate logged in May.

The details under the hood, so to speak, also largely provided good news for consumers and Fed officials. Goods deflation continued—driven by falling new and used vehicle prices—while services costs also trended down. And housing costs, a persistently stubborn sector when it comes to progress in taming inflation, increased just 0.2% on the month—a slowdown from the consistent monthly readings of 0.4%.

“From goods to services, the June CPI report really pushed all the right buttons,” Pride said.

But while the June inflation data provided the third consecutive month of moderating price growth, most economists and analysts say a rate cut at the July 30-31 meeting of the Federal Open Market Committee is unlikely.

Additionally, there may be more bumps in the road ahead with inflation, warns William Blair’s macro analyst Richard de Chazal.

“We should still not expect this to be a smooth transition back to 2% from here given that the annual rate of change comparisons start to become tougher through the second half of this year,” de Chazal writes. “The upshot here is that progress on inflation is still now more definitively being made, though the index still faces some tougher comps [comparisons] in the second half of the year, implying a slower pace of improvement.”

And there is plenty more data to come. Prior to the close of the Fed’s September 17-18 policy meeting, the Bureau of Labor Statistics is set to release two more CPI readings, three producer price index prints that will provide details on wholesale inflation, as well as two additional jobs reports. The Fed will also get two more months of data from its preferred inflation gauge, the personal consumption expenditures price index.