CPI Report to Bolster Fed’s Disinflation Confidence

The upcoming June Consumer Price Index (CPI) report is anticipated to reinforce the Federal Reserve’s confidence in its disinflation strategy, following a promising May report. I’m forecasting a modest increase in the headline CPI by 0.1% month-over-month (m/m), translating to a year-over-year (y/y) rate decline to 3.2%. This anticipated increase is partly due to a continued decrease in energy prices. The core CPI, which excludes volatile food and energy prices, I’m expecting to rise by 0.2% m/m. Slightly higher than May’s core CPI increase, this is still seen as a favourable outcome by the Fed.

Detailed Forecast Analysis

Headline CPI: Expecting to rise by 0.1% m/m, leading to a y/y rate of 3.2%.Core CPI: Predicting to increase by 0.2% m/m, slightly up from May but still manageable.Non-Housing Services: Likely to see a rebound, with motor vehicle insurance and other non-housing services contributing to the rise.Owner’s Equivalent Rent (OER) and Rent: Expected to show a small decrease from May’s figures, aiding the overall inflation outlook.Key Drivers and Sector Analysis

Non-Housing ServicesThe core CPI's expected increase is driven by a rebound in non-housing services. This category saw a surprising decline in May due to a drop in motor vehicle insurance prices. June is expected to see a reversal, with both motor vehicle insurance and other non-housing services experiencing price increases.Over time, inflation in non-housing services is expected to moderate, aided by cooling wage inflation in the services sector. However, a prolonged period of deflation is considered unlikely.Housing Market: OER and RentThe report anticipates a slight decline in OER and rent prices from May. This moderation is attributed to the significant price increases in a few metropolitan areas in May, which are not expected to recur in June.The broader trend suggests that rent and OER price increases will cool in the coming months, further bolstering the Fed’s confidence in managing inflation.Core GoodsCore goods prices are expected to fall for the fourth consecutive month, driven by declining new vehicle prices as inventories rise and manufacturers offer more incentives.While the short-term outlook is for continued price declines, there are potential upside risks due to higher shipping costs. However, cooling demand may limit the ability of manufacturers to pass these costs onto consumers.Implications for Federal Reserve Policy

Potential Rate Cuts: Should the CPI report align with these expectations, it would support the base case scenario for the Federal Reserve to begin cutting rates in September/December.Early Cuts: A continued 0.2% m/m increase in core CPI could increase the likelihood of an earlier rate cut, particularly if there are additional signs of economic softening.The June CPI report is expected to be a crucial indicator for the Federal Reserve, reinforcing its confidence in the current disinflation trajectory. Key sectors, including non-housing services and the housing market, are showing signs of stabilization, while core goods prices continue to decline. These trends support the expectation of a rate cut in December, with potential for an earlier adjustment if inflation pressures continue to ease.

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