The inflation report that is highly anticipated is set to be released on Thursday and it may confirm the expectations for the Federal Reserve to reduce interest rates in the upcoming months. The report is for the consumer price index (CPI) for the month of June and is scheduled to come out at 8:30 a.m. ET. Recent economic data has indicated that both inflation and economic growth are slowing down, with the report from last week showing that unemployment in June increased to 4.1%.
Federal Reserve Chair Jerome Powell recently testified for two days on Capitol Hill and although he did not specify the exact timing of rate cuts, he did mention that the risks to the economy are more balanced between inflation and recession. Powell also stated that waiting for inflation to hit the 2% target level is not necessary to cut rates.
Economists surveyed are expecting the CPI to increase by 0.1% month over month and by 3.1% year over year. The core CPI, which excludes volatile food and energy prices, is predicted to rise by 0.2% from May and by 3.4% since last June. In May, the CPI remained unchanged month over month and was up 3.3% annually.
The trends in unemployment and inflation could strengthen the case for rate cuts, according to Matt Brenner, managing vice president at MissionSquare Retirement. The levels of inflation are still higher compared to the Fed’s target of 2%, and the unemployment rate remains historically low at 4.1%. However, with unemployment gradually increasing and inflation decreasing, the focus may shift towards the trends rather than just the levels, increasing the likelihood of a rate cut.
The components that make up the CPI index, especially changes in prices for shelter and medical care services, will be closely watched on Thursday. These areas are also significant parts of the personal consumption expenditures index, which is the Fed’s preferred inflation measure. Medical services have shown mild price changes, which is crucial as it makes up a larger portion of the PCE index.
As for the market impact, both stocks and bonds have been performing well in July as traders become more confident in a potential rate cut later this year. The S&P 500 reached a record high on Wednesday. Fed funds futures pricing indicates that traders expect rates to remain steady at the upcoming meeting, followed by a cut in September. A month ago, the chances of a pause in September were uncertain, but now the likelihood of a cut has increased.
If the inflation reading on Thursday is lower than expected, stocks could rally as some investors are still concerned about earlier inflation spikes. Overall, the market response to the CPI report may not be significant due to the expected hold in July and the limited near-term rate cut pricing.
In conclusion, the inflation report on Thursday will provide valuable insights into the current economic situation and may influence future decisions by the Federal Reserve regarding interest rates.