Inflation in June is expected to have slowed down due to declining car prices and a moderation in rent growth. This development comes as good news for the Federal Reserve, although it may not be sufficient to deter the central bank from raising interest rates later this month.
Consumer Price Index (CPI)
According to economists’ forecast gathered by FactSet, the consumer price index likely increased at an annual pace of 3.1% in June. This marks a significant decrease from the 4% pace recorded in May, bringing annual headline inflation down to its slowest rate since March 2021.
Core CPI, which excludes the volatile food and energy prices and provides a better assessment of underlying price growth, is expected to exhibit a similar trend. Economists anticipate a 0.3% increase in core inflation for June, compared to the 0.4% jump observed in May. This translates to an annual pace of 5%, down from the 5.3% annual rate seen in the previous month.
The upcoming release of the June CPI data holds particular significance as it will be the only set of inflation figures available before the Fed’s policy-making committee convenes on July 25-26. During this meeting, officials will discuss whether it is appropriate to raise interest rates for the 11th time during this tightening cycle or maintain them at the current level of 5-5.25%.
June Inflation Data and the Fed’s Rate Hike
Economists are anticipating that the June inflation numbers will align with expectations, showing a cooling trend. However, this slight dip in inflation is unlikely to deter the Federal Reserve from proceeding with its 11th rate hike. The recent employment figures for June indicate a tight labor market, prompting many Fed officials to express the belief that more tightening of monetary policy is necessary.
Looking ahead, the path for future rate hikes becomes less certain after July.
BNP Paribas economists, led by Carl Riccadonna, argue that a relatively modest Consumer Price Index (CPI) report for June would not prevent the Fed from raising rates later this month. However, if subsequent months also reflect benign inflation readings combined with a weakening labor market, it is expected that the urgency to tighten monetary policy will diminish after July.
Of particular interest to the Fed in the June data is identifying the factors contributing to the slowdown in overall price growth. It is anticipated that moderating rents will contribute to a decrease in headline price growth. This deceleration has been anticipated for some time. Additionally, the recent spike in used car prices is expected to have subsided in June, resulting in a mild decline in core goods prices.
Core Services Show Strength Despite Housing Slowdown
As the Federal Reserve continues to monitor the economy closely, it has shifted its attention towards core services excluding housing. According to Citi economists, transportation, recreation, and communication services are expected to experience a mild rebound in June. This anticipated growth may result in a larger month-over-month increase in non-housing services compared to the past three months.
The Consumer Price Index (CPI) data, which includes these core services, will be released by the Labor Department. This data will provide valuable insights into the performance of various sectors.