The U.S. Consumer Price Index data for June is anticipated to show a decrease in inflation, potentially paving the way for an interest rate cut by the Federal Open Market Committee later in 2024. Nowcast inflation projections from the Federal Reserve Bank of Cleveland indicate that headline CPI inflation for June is expected to increase by 0.08%, while core CPI inflation, excluding food and energy, is forecasted to rise by 0.28%. Similarly, Personal Consumption Expenditures inflation data, which the FOMC prefers, is projected to show a monthly PCE inflation of 0.09% and core monthly PCE inflation of 0.21%.
Historically, these estimates have been generally accurate in predicting where monthly inflation figures might land. If these forecasts hold true, the FOMC will likely view the monthly figures favorably, although they are currently influenced by declining energy prices. The FOMC is seeking core inflation rates below 0.3%, ideally closer to 0.2%, as an indication that inflation is moving towards target levels. While inflation in the early months of 2024 was a cause for concern, trends in April and May have been more reassuring.
The release of the CPI data for June is scheduled for July 11, followed by the PCE release on July 26. Shelter costs are a key focus area within inflation data, as they carry a significant weight in the CPI index and have been rising rapidly. There is an expectation that shelter costs may eventually decrease, which could help bring annual inflation closer to the FOMC’s target. Prices of certain physical goods like vehicles have been dropping, contributing to lower inflation. However, the FOMC remains concerned about pricing for services, though pricing growth in this area has eased in recent months.
While the FOMC pays more attention to the overall trend in inflation data rather than specific releases, if the estimates for June hold, it could bolster the case for interest rate cuts. The FOMC may consider cutting rates as early as September. However, the committee is seeking several months of mild monthly inflation reports with around 0.2% core monthly inflation to be confident that inflation is heading back towards the 2% annual target. The main factor to watch is whether shelter costs will cool, as this could impact the pace of interest rate cuts by the FOMC.
Overall, June’s inflation data is not expected to be a definitive factor in the FOMC’s decision-making process. However, continued evidence of easing inflation could support the anticipated interest rate cuts later in 2024. The key question lies in when shelter costs might begin to decrease. If this happens, the FOMC may opt for more aggressive rate cuts than currently forecasted. Conversely, an unexpected increase in inflation above 0.3% or even 0.4% could delay the anticipated interest rate cuts in 2024.
