Inflation and the Fed – Part II — Evening Brief – 07.11.24
The June consumer price index data revealed that core inflation fell more than predicted last month as services inflation, including a cooling in crucial housing costs. Expectations for additional proof of a return to disinflationary trends were elevated going into today’s print, and they were more than met by a 0.1% fall in headline consumer prices, the largest monthly decline since May 2020, compared to projections of a 0.1% gain. The year-over-year figure fell to 3.0% from 3.3% the prior month.
The core CPI, which excludes volatile food and energy prices, rose just 0.1% in June, below forecasts of a 0.2% rise. Meanwhile, the annual rate printed at 3.3%, down from 3.4% in May’s and below expectations for of 3.5%.
A 3.8% drop in gasoline prices slowed inflation for the month, countering 0.2% rises in food and shelter expenses. Housing-related costs have been one of the most tenacious components of inflation, accounting for around one-third of the weighting in the CPI, so a slowing in the rate of increase is encouraging.
The owners’ equivalent rent (OER) decline to 0.3%, the smallest since early 2021. “Monthly changes in OER tend to gradually accelerate in the early stages of expansions before slowly decelerating in advance of recessions,” observed Cycle Framework Insights Chief Strategist, Bryan Jordan. “Disinflation remains well entrenched and is a good bet to pick up speed in the months ahead as rent prices, in particular, continue to cool.”
This is the third straight CPI miss, sparking calls for a July interest rate cut, as the 3-month and 6-month annualized inflation rates decline, although the chances of a cut remain slim.
“One word: pivotal. With three inflation prints between this morning and September’s Fed meeting, today’s print was crucial in helping the Fed gain confidence inflation is still moving in the right direction,” said Lindsay Rosner, strategist at Goldman Sachs Asset Management. “The economic data heat wave seems to have subsided as we are getting cooler inflation data on the heels of cooler labor market prints last week. Cooler temperatures forecast a Fed cut in September.”
Following the release of the data, markets were pricing in an 87% chance of a quarter-point interest rate cut at the September FOMC meeting, up from 71% before the release. The markets now expect an 85% chance of two quarter-point cuts before the end of the year, up from 74%. The likelihood of a third quarter-point cut this year has increased to 39% from 27.5%.
In comments to reporters, San Francisco Fed President Mary Daly described the recent inflation data as a “relief” that strengthens the case for lower interest rates, even if the timing is still debatable. “With the information we have received today, which includes data on employment, inflation, growth, and the outlook for the economy, I see it as likely that policy adjustments, some policy adjustments, will be warranted,” Daly said. “Exactly when that happens…is still unclear.”
“This report is the cherry on top of the cake for both the Fed and investors who are eager to see rates slashed at long last,” added Richard Flynn, managing director at Charles Schwab.