Consumer prices likely continued to fall in June, if forecasts are correct, keeping inflation on a path toward a level that could give the Federal Reserve confidence to cut interest rates this year.
The Bureau of Labor Statistics’ report on the Consumer Price Index due Thursday is expected to show that the widely watched measure of inflation rose 3.1% over the year, down from a 3.3% annual increase in May, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
If the report matches expectations, it would help confirm that inflation has resumed its descent after a worrisome uptick in the first quarter. That could have implications for interest rates on all kinds of loans. The lower inflation gets, the more reason officials at the Fed, who set the central bank’s influential fed funds rate, will have to cut the rate sooner, pushing down borrowing costs.
Fed officials have kept the rate at a 23-year high since last July in an effort to discourage borrowing and spending and push down inflation from the four-decade high it hit in 2022.
Recently, policymakers have said they’re closely monitoring inflation data for signs that price increases are on their way back to their goal of a 2% annual growth rate before making any cuts.
As of Monday, financial markets were pricing in more than a 75% chance that the Fed will cut the rate at its September meeting, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
As inflation cools, the Fed may turn its attention from fighting inflation to preventing a sharp economic slowdown—a possibility that appeared more likely after a separate BLS report last week showed that the unemployment rate ticked up in June to its highest level since late 2021.
The details of the report may shed light on inflation’s impact on people’s everyday finances, as well as the outlook for the Fed.
Much of the expected decline in inflation is due to prices for several key items in household budgets staying flat or even falling.
Gas prices fell on a seasonally adjusted basis while grocery prices are also expected to have moderated, as evidenced by several major retailers announcing promotions or price cuts, keeping a lid on grocery bills, economists at Wells Fargo Securities wrote in an analysis.
Leave out those prices for food and gas—which can rise and fall for reasons that have little to do with broader inflation trends—and “core” inflation is expected to have stayed at a 3.4% annual increase, the same as in May, according to the median forecast. Policymakers pay closer attention to core inflation when setting interest rates.
Forecasters are calling for core prices to be stickier because a few key prices could bounce back from their readings in May, which were unexpectedly low, namely car insurance and airline tickets, economists at Deutsche Bank said in a commentary.
Still, inflation is likely to stay relatively tame, with price increases moderating through 2025, economists at Wells Fargo Securities said. One key reason: consumers have just about hit their limit for how much they’re willing and able to pay for things, and merchants know it.
“More tepid consumer demand is likely to keep a lid on goods prices,” economists Sarah House and Aubrey George wrote in a commentary. “Increasingly cost-conscious consumers are also likely to limit the extent of price increases across the service sector.”
Tags :
Economic News, Inflation Report
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