Inflation in the US turned negative on a monthly basis for the first time in 4 years in June and continued to slow on an annual basis, paving the way for the US Federal Reserve (Fed) to make its first interest rate cut at the end of the summer.
While Fed officials, especially Chairman Jerome Powell, have expressed at every opportunity that they want to see more positive data to ensure that inflation falls sustainably to the 2 percent target, the latest inflation data came in below expectations.
Consumer Price Index (CPI) data released yesterday in the USA revealed that the disinflation trend continues.
The country’s CPI decreased by 0.1 percent on a monthly basis in June, while increasing by 3 percent on an annual basis, below market expectations.
While the CPI decreased for the first time since May 2020 on a monthly basis, it recorded its lowest increase since June 2023 on an annual basis.
Core CPI, which excludes volatile energy and food prices, also fell short of market expectations, rising by 0.1 percent monthly and 3.3 percent annually in June. Core inflation recorded its lowest level since April 2021 on an annual basis.
The slowdown in inflation during this period was driven by the decline in gasoline prices and the slowdown in the rate of increase in housing costs.
Analysts said the slowdown in inflation in June, following that seen in April and May, brought the Fed one step closer to cutting interest rates in September.
Following the inflation data, the probability that the Fed will make its first interest rate cut in September increased from 70 percent to 93 percent in money market pricing.
“JUNE CPI DATA COULD NOT BE BETTER”
Moody’s Analytics Chief Economist Mark Zandi, in his statement to AA, said, “June CPI data could not have been better.”
“The Fed is being extraordinarily cautious but has to have enough confidence that inflation will be back on target by the September meeting and that it will cut interest rates by a quarter point,” Zandi said, noting that inflation has been steadily declining.
The Fed should then cut the interest rate, currently near 5.5%, by a quarter point each quarter until it drops to 3% in 2026, Zandi said.
“WE PREDICT THAT THE INTEREST RATE WILL BE REDUCED TO 4 PERCENT BY MID-2025”
Padhraic Garvey, ING’s regional head of Americas research, described the latest US CPI data as “surprisingly weak”.
Garvey noted that the increase in housing prices has finally slowed down, while monthly decreases were recorded in items such as new and second-hand vehicle prices and airline ticket prices.
This supports the view that the Fed may begin to ease monetary policy slightly from restrictive territory to “slightly less restrictive,” Garvey said.
Garvey said they maintained their forecast for three interest rate cuts this year, compared to the market expectation of two, adding, “We anticipate the interest rate will be reduced to 4 percent by mid-2025.”
“This is what we needed. A repeat of the May data, but better,” Garvey said.
FED’S LIKELIHOOD IS GETTING STRONG TO START CUTTING INTEREST RATES IN SEPTEMBER
Ryan Sweet, chief U.S. economist at Oxford Economics, said the good news on inflation over the last few months should strengthen confidence that inflation is moving toward its target.
“The decline in CPI between May and June will not be permanent, but it does raise the possibility that the Fed will begin to cut interest rates in September, especially as the labor market softens,” Sweet said.
Sweet said they were careful not to attribute too much meaning to the decline in the CPI in June, explaining that seasonal factors were more effective than expected, and that the large decline in gasoline and airline ticket prices also contributed to the decline, but these prices are variable.
Noting that there are also encouraging signs regarding housing inflation, Sweet said that rents recorded their lowest monthly increase since August 2021.
Sweet said gasoline prices rose in early July due to rising global oil prices and seasonal demand, adding, “If we go back to July, the CPI will be a little less friendly to the consumer and the Fed.”
