United States: Headline inflation weakens in June; Federal Reserve rate cut appears increasingly imminent
Consumer prices rose 0.1% over the previous month in June, increasing by the same margin as in May. The print was largely driven by a rebound in prices for used cars and trucks after several months of decline, while prices for apparel and shelter also rose in June. Conversely, energy costs fell notably on a sharp decline in gasoline prices, while price pressures for food and medical services softened from the prior month. Core consumer prices—which exclude volatile items such as food and energy—rose 0.3% in June, up from May’s 0.1% increase and marking a one-and-a-half year high.
Inflation eased to 1.6% in June from 1.8% in May on tumbling energy prices and softer food inflation, matching market expectations. On the other hand, core inflation edged up to 2.1% in June from 2.0% in May.
The June CPI report comes on the heels of Fed Chairman Jerome Powell’s testimony to Congress during which he discussed the growing headwinds to the economic outlook and the risk of persistently weak inflation. The hearing signaled the Federal Reserve is seriously mulling over a rate cut at its 30–31 July meeting. Particularly, Powell addressed concerns over the indirect impact of the U.S.-China trade war on constraining business investment, which threatens to thwart the current expansion. Moreover, Powell dismissed the solid June jobs report and the notion that record-low unemployment is likely to stoke inflationary pressures at this stage of the economic cycle. A large majority of our panelists now believe a cut in Q2 to be the most probable scenario.
Remarking on their scenario for the July FOMC meeting, CIBC economists noted:
“Upside surprises in both employment and inflation might ordinarily put the Fed in a position to stand pat, but Powell’s testimony yesterday convinced us that the FOMC wants to cut now, ask questions later. We brought forward the timing of the first of our two forecast quarter point cuts to July, with a second one due in Q4. But the fact that core inflation isn’t in a nosedive, and the decent shape of the household sector, both lean towards our view that a total of 50 bps in insurance cuts will be sufficient, and that the Fed will be on hold in 2020.”
Economists at TD Economics also foresee a preemptive rate cut in July, stating:
“As affirmed both in the FOMC minutes and Chair Powell’s testimony, the crosscurrents of weaker global growth and risks has spurred the Fed to take out insurance by cutting rates at its meeting the end of this month.”