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A chorus of economists now loudly predicts that the Federal Reserve will soon begin cutting interest rates following the latest cooler-than-expected inflation report.
In June, the Consumer Price Index (CPI) measured by the Bureau of Labor Statistics rose by 3% year-over-year, dropping from May's rate of 3.3% and falling below economists’ expectations of 3.1%. Significantly, the consumer spending basket contracted by 0.1% month-over-month, marking the first deflationary print since May 2020.
President Joe Biden highlighted the positive developments in a White House press release: “Today’s report shows that we are making significant progress fighting inflation.”
Overall prices fell in June after remaining flat in May, and core inflation reached its lowest point in over three years.
“Prices are falling for cars, appliances, and airfares, and grocery prices have fallen since the beginning of the year,” Biden added.
Biden acknowledged that prices are still too high and criticized big corporations for not doing enough to lower prices.
“I’m fighting to give families more breathing room by taking on Big Pharma to cap insulin at $35 per month, taking on Big Oil to lower prices at the pump, and taking on Wall Street to make the wealthy pay their fair share,” he stated.
He also accused Republicans of prioritizing tax cuts for billionaires and raising costs for the middle class, potentially reigniting inflation.
“‘Ay Caramba! This inflation report aligns perfectly with the FOMC's hopes,” Andreas Steno Larsen, managing partner at Steno Research, said.
“This is just what the JayMan needed,” he added, referring to Fed Chair Jerome Powell.
The report validates a softer inflation outlook, hinting at positive reactions from the Japanese yen and the Chinese yuan, with celebrations being heard in Beijing and Tokyo.
JPMorgan's senior analyst Christopher Hovers, CFA, said the report supports the view that durable product prices are stabilizing.
“Given a cooler print, longer-term/mortgage rates are likely to further tick down this morning,” the analyst said, expecting support for cyclical names in their coverage, namely Lowes Companies (NYSE:LOW), Home Depot Inc. (NYSE:HD) and Wayfair Inc. (NYSE:W).
“The CPI report won't be enough to convince the Fed to cut interest rates at their decision this month, but a rate cut at the following decision in September is quite likely,” said Bill Adams, chief economist for Comerica Bank, stated.
He explained that the Fed targets 2% inflation by the personal consumption expenditures price index, which usually runs cooler than the CPI.
“Consumers are more sensitive to price increases after several years of high inflation, making businesses more cautious about raising prices and slowing inflation,” Adams said.
“This will encourage markets to increase the probability of a September rate cut by the Federal Reserve,” Mohammed El-Erian, president of Queens’ College and chief economic adviser at Allianz, commented.
Quincy Krosby, chief global strategist at LPL Financials, suggested that the Fed might lower rates sooner than September if the labor market softens more quickly.
“Fed Chair Powell has increasingly invoked the Fed’s maximum employment mandate as a rationale for lowering rates if necessary to support the labor market,” Krosby said. For the market, the preferred basis for easing rates is a steady cooling of inflationary pressures rather than an economy losing momentum.
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