On Wednesday, investors will be closely watching for one of the most important data points the Federal Reserve will consider in its next interest rate decision: the June inflation report.
The Consumer Price Index (CPI), set for release at 8:30am ET, is expected to show prices cooled further last month, with headline inflation forecast to rise 3.1% over the prior year, a continued slowdown from May’s 4% annual gain, according to estimates from Bloomberg.
A 3.1% increase would mark the slowest annual increase in consumer prices since March 2021.
Over the prior month, consumer prices are expected to have risen 0.3% in June, up from the 0.1% monthly increase seen in May.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in June are expected to have risen 0.3% over the prior month and 5% over last year, according to Bloomberg data.
According to a new note from Citi, the slowdown will be largely tied to further easing in shelter prices — which has long been widely expected — along with a decline in used car prices.
Still, inflation is expected to remain significantly above the Federal Reserve’s 2% target. That, along with last week’s jobs report data that showed a resilient labor market with unemployment low and wages high, suggests the Federal Reserve will continue to raise interest rates this year.
Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly both signaled on Monday more rate hikes were needed to tame inflation.
The central bank paused its aggressive rate hiking cycle in June but implied it will likely raise rates by 0.25% two more times this year (or raise rates by 0.50% in one shot).
Citi analyst Veronica Clark echoed those rate hike expectations in a note to clients on Monday, writing, “The expected slowing in June CPI is unlikely to change the outcome of a July rate hike, and we expect data beyond July, including a 0.4% increase in June core PCE depending on details of PPI, will keep the Fed raising rates again in September.”
Oxford Economics US economist Oren Klachkin added, “While another rate hike in July will increase the likelihood of a recession, policymakers appear willing to make the trade-off. Their data-dependent approach means they will wait to be absolutely sure that inflation is on a firm and clear path to 2% before considering loosening policy.”
Currently, markets are pricing in a roughly 92% chance the Federal Reserve raises rates by another 0.25% at its July 26 policy meeting, according to data from the CME Group.
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