On Thursday, investors will be digesting June’s Consumer Price Index (CPI), one of the most important data points that will shape the Federal Reserve’s interest rate policy going forward.
The inflation report, due for release at 8:30 a.m. ET, is expected to show headline inflation slowing to 3.1% from a 3.3% increase in May. Further declines in energy prices are likely to have contributed to further downward pressure on headline CPI, which will mark the smallest annual increase since January.
Month-on-month, consumer prices are expected to rise 0.1%, up slightly from the flat reading in May.
Meanwhile, on a “core” basis – which excludes volatile costs such as food and gasoline – prices are expected to have risen 3.4% in June from a year earlier and 0.2% from the previous month, unchanged from May, according to Bloomberg data.
“Following an undoubtedly strong May CPI report, we expect the June CPI report to again provide some confidence boost,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note last week.
The expected figure “would not be as low as May’s, but would still be good for the Fed,” the economists said.
Thursday’s inflation data came at a critical time for the central bank, as slowing job market growth and recent testimony from Federal Reserve Chairman Jay Powell kept interest rate cut expectations alive.
Powell, who finishes his semi-annual policy update to Congress on Wednesday, is largely sticking to his data-dependent view, a positive sign given the recent strong data. On Tuesday, he told the Senate Banking Committee that while there is evidence inflation is moderating, the Fed needs more “good data” to be confident that inflation is on track to its 2% goal.
Core inflation has remained stubbornly high due to rising costs of core services like housing, insurance and health care. Non-residential services “surprisingly fell slightly in May, mainly due to a slight decline in auto insurance,” Bank of America’s Juneau and Gapen wrote.
But economists expect this sector (and auto insurance) to rise in June, signaling a “tough” road ahead when it comes to price stabilization.
“Given slowing wage inflation in the services sector, inflation in the non-residential services sector should ease over time, but prolonged deflation is unlikely,” they warned.
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