U.S. Consumer Price Index data for June is expected to further confirm cooling inflation. This could lend support to a potential interest rate cut from the Federal Open Market Committee later in 2024.
Nowcast Inflation Projections
Nowcasts as modeled by the Federal Reserve Bank of Cleveland suggest that the monthly increase in headline CPI inflation for June will be 0.08% and that core CPI inflation, removing food and energy, will be 0.28%.
Turning to Personal Consumption Expenditures Price Index inflation data, which the FOMC prefers but is released later in the month, the expectation is for increases of 0.09% in monthly PCE inflation and 0.21% in core monthly PCE inflation.
Of course, these estimates historically have not been completely precise. But they have been broadly accurate in suggesting where monthly inflation figures might fall. Should these forecasts hold, the headline monthly figures will be encouraging to the FOMC, though they are temporarily impacted by declining energy prices.
Core inflation of less than 0.3% and ideally closer to 0.2% is what the FOMC is looking for in terms of confidence that inflation is returning to target levels. So far in 2024, monthly inflation in January, February and March was concerning to the FOMC, but inflation trends April and May have been more reassuring.
Inflation Release Timing
The CPI release for the month of June will come at 8:30 a.m. ET on July 11 and the corresponding PCE release will be at 8:30 a.m. ET on July 26.
Underlying Inflation Trends
Within inflation data, one of the main areas of focus is shelter costs. This component carries a large weight within the CPI index and has been rising relatively fast. There is an expectation, based on other rental cost estimates, that shelter costs may ultimately cool. But we haven’t seen that in the CPI report yet. Should that happen, it may help move annual inflation closer to the FOMC’s goal.
Elsewhere, certain physical goods including vehicles have been falling in price, helping pull inflation lower. The FOMC had expressed concern about pricing for services, beyond housing, though in recent months pricing growth here has eased somewhat. Energy prices and related transportation services have declined, but the FOMC tends to look past relatively volatile energy price trends.
Still, overall inflation appears to be moving back toward the FOMC’s target level. If shelter costs were to cool, then that might help inflation return to 2% relatively rapidly.
The Likely Federal Reserve Reaction
The FOMC pays more attention to the overall trend in inflation data than specific releases. But if estimates hold, then June inflation should lend support to the FOMC cutting interest rates, perhaps as soon as September.
However, there will be two additional months of CPI releases before that decision. The FOMC is looking for several months of mild monthly inflation reports with around 0.2% core monthly inflation to be confident that inflation is trending back to its 2% annual inflation target.
What To Expect
June’s inflation data is unlikely to be decisive for the FOMC’s decision making. However, further evidence of a trend of easing inflation could support two expected cuts to interest rates later in 2024. The main question is if and when shelter costs might cool. Should that occur, then the FOMC might cut interest rates more aggressively than the current forecast. Equally, an unexpected spike in inflation to more than 0.3%, or even 0.4%, might set back expectations for 2024 interest rate cuts.
Read the full article here
