Cool CPI Inflation Lifts Fed Rate-Cut Hopes
Prices for core services increased 0.1 percent after a moderate 0.2 percentage rise in May.
By Investor’s Business Daily
Consumer price index data for June showed that core inflation cooled more than expected last month as services inflation turned mild — even housing costs. The S&P 500 reversed solidly lower, a sign that the strong bull market may take a breather, but Treasury yields tumbled as Wall Street celebrated the implications for Federal Reserve rate cuts.
| X NOW PLAYING How The New CPI And PPI Reports Could Impact The Fed, Inflation And Interest Rates
CPI Inflation Report Hits And Misses
The consumer price index was unexpectedly down 0.1 percent in the month in comparison to. +0.1 percent predicted. The 12 month CPI inflation rate decreased to 3.3% from 3.3 percentage in May.
The core CPI is the one that excludes volatile energy and food prices, climbed only 0.1 percent versus. May’s levels, which was lower than 0.2 percent estimates. The 3.3 per cent 12-month base CPI price index, which was down from the May’s 3.4 percent, was below 3.5 percent expectations. Core CPI inflation rate reached an all-time high of 6.6 percent on September 20, 2022.
In a non-rounded way on a non-rounded basis, the basic CPI increased just 0.06 percent in June. It was the lowest level in the past month since Jan. 2021.
The cost of goods decreased 0.1 percent in June and 1.8 percent compared to the previous year. Prices for new cars dropped 0.2 percent in May and 0.9 percent from June 2023, which is the largest year-over-year drop since May 2018.
Core service prices increased by only 0.1 percent, which is the lowest since August 2021, following May’s modest 0.2 percent increase.
The overall cost of shelter increased 0.2 percent, in the midst of an 2.5 percent decline in motel and hotel rates. However, 0.3% increases in primary rent and equivalent owner’s rent were also among the lowest rises since August 2021.
The cost of transportation services dropped 0.5 percent over the course of a second month row as airfares fell 5percent.
Stock Market Flashes Biggest Warning In A Year
Jobless Claims
Initial claims for unemployment benefits unexpectedly dropped to 222,000 during the week ending July 6 from 239,000 in the previous week. However, economists should take the numbers with a grain of salt during July and in early August.
Adjustments to the season for the week of July was complicated due to this holiday on July 4, the summer break for schools, and auto-factory retooling.
CPI Vs. PCE Inflation
Remember that the primary inflation measure, the primary PCE price index usually is slower as the main CPI. This was the case in May, where the main CPI increased by 0.16 percent, but it was the primary PCE price index grew by just 0.08 percent, the lowest increase since November of 2020.
The main reason for this discrepancy is that housing expenses that have been able to rise faster than inflation in the core overall make up 43 percent of the core CPI basket, but only 18% of the core PCE expenditures.
CPI data comprise around 70 percent in PCE cost index elements, the remainder of the components coming from the producer index, which includes costs for health medical. PPI data released on early on Friday morning at 8:30 a.m. will enable economists to improve their predictions for June’s core PCE Price Index, which is scheduled to be published on July 26.
On the basis of CPI information, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote on Thursday that he is anticipating an 0.17 percent increase in the PCE price index. PCE cost index in June.
Costs for food outside of home, which climbed 0.4 percent in June. This is one of the categories that are still experiencing high inflation. Although they are not included in the main CPI food service prices are included in central PCE prices index.
Fed Chair Powell Turns More Dovish
Federal Reserve Chairman Jerome Powell spoke to the Senate panel on banking this week that the job market “appears to be fully back in balance,” lowers the threshold for interest rate reductions.
Powell has stated for some time that the market for labor has been cooling. However, he stated this time that it “has cooled really significantly across so many measures.”
Since the end of 2022, Powell has been adamant about the rise in the rise in prices for nonhousing services as one of the key factors in the outlook on interest rates, since wages comprise a significant portion of the cost for services ranging including haircuts, health care to food and beverage. However, Powell has said on Tuesday it does “not a source of broad inflationary pressures for the economy now.”
The announcement came after Powell’s soft tone at an European Central Bank forum last week: “We are getting back on a disinflationary path,” as well as stating that better inflation data is required.
Fed Rate-Cut Outlook
Following the release of the release of the CPI inflation figures markets are forecasting 93% probability of cutting rates by September. 18. Fed meeting, which is up from 71% prior to the CPI data. Markets now have 91.5 percentage chances of two quarter-point cuts prior to the end of this year, which is up from 74 percent.
The odds of a third quarter point cut this year increased to 48%, up from 27.5 percent.
Powell has claimed that unjustified weakness in the economy would cause more pressure to lower the key interest rate of the Fed from its current levels of restraint. Powell’s assessment that the labor market is “strong” makes clear that we’re not there yet. However, his belief that the market for labor is perfectly balanced between the demand and supply for workers indicates an increase in the cooling in the labor market may speed up Fed rate cuts.
S&P 500
The S&P 500 initially climbed following reading the July CPI inflation report, but it changed direction to an 0.9 percentage decline in Thursday’s market activity. The S&P 500 gained 1% during the market on Wednesday it was the highest gain of it’s seven session streak. The S&P 500 reached its 37th record this year, is expected to climb 17.1 percent in 2024.
Ten-year Treasury yield dropped 8 basis points, or 0.8 percentage point to 4.20 0.9%, close to the four-month low.
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