The path appears clear for a September interest-rate cut from the Federal Reserve, after June’s consumer price index (CPI) release showed that Americans actually saw an overall decline in prices for the first time since the early days of the COVID pandemic.
The U.S. Bureau of Labor Statistics said on Thursday that June’s consumer price index, which measures the change in prices on a variety of consumer goods and services, was 0.1% lower compared to May on a seasonally adjusted basis. Dow Jones-polled economists were expecting a 0.1% increase in CPI, and it marked the first deflationary reading in the data since May 2020.
As a result, the year-over-year change in inflation sank to 3.0% (down from 3.3% in May), also falling below economists’ expectations of 3.1%.
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“Core” CPI—a measurement that backs out food and energy costs, which are more volatile than the other costs tracked by the Labor Department—also came in lower than expected, at +0.1% versus projections for +0.2%. The report also showed the lowest year-over-year growth in core CPI since April 2021, coming in at 3.3% vs. expectations for 3.4%.
Here’s a quick look at June’s key CPI figures:
- MoM CPI: -0.1% (vs. +0.1% est.)
- YoY CPI: +3.0% (vs. +3.1% est.)
- MoM Core CPI: +0.1% (vs. +0.2% est.)
- YoY Core CPI: +3.3% (vs. +3.4% est.)
The market has been increasingly betting on a September rate cut amid various data signaling that the U.S. economy is slowing. Wednesday’s CPI report made a number of strategists and money managers even more confident.
“Given that the next Federal Reserve meeting is less than three weeks away, the market is currently pricing in that the Federal Reserve will skip that meeting and make their first cut in September,” says John Kerschner, Head of U.S. Securitized Products at Janus Henderson Investors. “Odds of a cut at that meeting are now close to 100%, according to the market. Maybe more importantly, the market is now expecting three cuts by the end of January 2025.”
However, one continued point of hesitancy is some experts’ belief that the Federal Reserve will shy away from making any policy moves until after the 2024 presidential elections in November.
“This CPI number does not move the Fed,” says Scott Helfstein, SVP, Head of Investment Strategy at fund provider Global X. “Since 1970, the Fed has only cut once in September out of six opportunities and only six times between August to November in six election years. The Fed does not want to appear as a political actor and will likely try to show restraint to maintain independence. … The Fed will likely try to hold this course until December if the upcoming GDP growth and corporate earnings numbers are strong.”
Among June’s most notable moves: Consumers felt continued relief at the pump, as gasoline declined by 3.8% month-over-month and 2.5% year-over-year. The price of used cars and trucks also fell 1.5% MoM, marking a steep 10.1% drop over the past 12 months. Electricity and transportation services also saw modest MoM declines.
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Most price gains were slight; food costs were up 0.2% MoM, apparel climbed 0.1%, and medical care services were up 0.2%.
“From goods to services, the June CPI report really pushed all the right buttons,” says Jason Pride, Chief of Investment Strategy & Research at Glenmede. “The goods deflation story continued, and it wasn’t just the volatile food and energy components – core goods also fell -0.1% for the month, particularly driven by falling prices for new and used vehicles. Services less rent of shelter, which had recently been the problem child stubbornly sticking above Fed targets, was also flat for June. Even shelter joined the party increasing a mere 0.2%, well below readings to start the year.”
More Pros’ Takes on June CPI
Here, we outline more thoughts from the experts on what June’s CPI numbers mean for consumers, markets, the Federal Reserve’s future actions, and more:
Lindsay Rosner, Head of Multi-Sector Investing, Goldman Sachs Asset Management
“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. 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.”
Josh Jamner, Investment Strategy Analyst at ClearBridge Investments
“The softest inflation print since the depths of the pandemic set up a September rate cut, as the pace of shelter inflation took another long-awaited step down. With recent Fedspeak suggesting the [Federal Open Market Committee] is coming to the view that the labor market is in better balance, the committee is looking to gain confidence that inflation is on a path to eventually return toward the 2% target, and today’s print combined with the May inflation data should help put committee members minds at ease.”
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“Fears that slowing inflation is coinciding with consumer weakness should be somewhat allayed by the rise in prices for Food Away From Home (+0.4% last month) which tends to be a more discretionary category. Similarly, the drop in initial jobless claims (+222k from +238k the week prior) as well as continuing claims (+1,852k from +1858k the week prior) suggests that while the labor market is normalizing, it isn’t seeing the type of weakness that could spark recessionary worries.”
Jay Hatfield, CEO, Infrastructure Capital Advisors
“The cool inflation print, combined with a weakening economy and labor market, indicates that the Fed should cut in July, but probably won’t due to its flawed policy framework and propensity to be behind the curve. We do believe that the Fed will definitely cut by September.
“The September Fed cut will usher in a wave of continued central bank cuts which will require a large injection of liquidity into the global banking system. Historically, large injections of liquidity cause rallies in both stocks and bonds. We reiterate our 6,000 target on the S&P and continue to believe that the market rally will broaden out during the summer.”
Sonu Varghese, Global Macro Strategist, Carson Group
“June CPI data was lower than expected, and highlights the fact that the disinflationary trend is continuing, with hot inflation data in Q1 just a blip along the way.
“Inflation is essentially last year’s problem, and likely running close to the Fed’s target of 2%. Risks are more on the employment side of the Fed’s mandate, rather than an inflation resurgence, which makes it likely that the Fed will start their rate cut cycle as early as September.”
Scott Helfstein, SVP, Head of Investment Strategy, Global X
“Price stability is more important than the 2% Fed target, and this CPI report suggests that price changes across most segments of the economy are stabilizing. Predictability may be more important to businesses and consumers than low prices after the bout of rapid inflation and could put us on a path to better than expected spending and investment.”
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