An Aldi supermarket in Alhambra, California, on June 27, 2024.
Eric Thayer | Bloomberg | Getty Images
A widely expected inflation report on Thursday could strengthen expectations that the Federal Reserve will cut interest rates in the coming months.
The consumer price index, or CPI, report for June is due at 8:30 a.m. ET. Recent economic announcements have suggested that inflation and economic growth are cooling, including last week’s report that unemployment in June reached 4.1%.
Thursday’s report comes after Federal Reserve Chairman Jerome Powell gave two days of testimony on Capitol Hill this week. The head of the central bank did not indicate when exactly the rate cut will begin. However, Powell said the Fed sees risks to the economy as more balanced between inflation and recession and that the center did not need to wait until inflation reached 2% to cut rates.
What to look for
Economists polled by Dow Jones are looking for CPI to rise 0.1% month-on-month and 3.1% year-on-year. Core CPI, which strips out more volatile food and energy prices, is expected to rise 0.2% from May and 3.4% from June last year.
In May, the CPI remained unchanged month-on-month and increased by 3.3% on an annual basis.
Focusing on unemployment and inflation trends could strengthen the case for rate cuts, said Matt Brenner, managing vice president, investment and product management at MissionSquare Retirement.
“The level of inflation is still elevated compared to the Fed [2%] objective. The unemployment rate is still historically very low at 4.1%. But the trend in both is that unemployment is gradually starting to rise and that inflation continues its downward trajectory,” said Brenner.
“For some time the Fed has been more rate-focused, and now it looks like they may be starting to lean more toward a trend focus. And if that’s the case, then the chances of a rate cut increase,” Brenner added. .
Price changes in the components that make up the CPI index will also be in focus on Thursday, especially if the number comes in differently than expected. Housing and medical care services could be key areas to watch, Wilmington Trust chief investment officer Tony Roth said.
Both housing and medical services are also key parts of the personal consumption expenditure index, the Fed’s preferred measure of inflation, rather than the CPI.
“We have seen medical services [be] pretty subdued, and that’s important because medical services make up a much larger portion of PCE, which is the more important of the two inflation indicators,” Roth said.
Market effect
The CPI report comes as markets are rising.
Stocks and bonds both rose in July as traders grew more confident of a rate cut sometime this year. The S&P 500 passed 5,600 for the first time on Wednesday.
The stock market rallied in July, with the S&P 500 hitting another record high on Wednesday.
Fed funds futures indicate traders expect the Fed to hold rates steady at its meeting later this month and then cut in September, according to the CME FedWatch Tool. A month ago, the odds of another pause in September were close to a hit, according to the same tool, which uses 30-day fed funds futures to come up with implied probabilities.
The expected hold in July could keep Thursday’s CPI report from being a big market mover, Bank of America rates strategist Meghan Swiber said in a note to clients on Wednesday.
“Cooling activity and constraints on near-term price cuts should limit market reaction in either direction,” Swiber said.
Still, Wilmington Trust’s Roth said stocks could rise if the inflation reading is cooler than expected because some investors haven’t shaken their fears from earlier this year, when inflation was briefly hotter.
“I don’t think the market has fully appreciated the weakness in the economy, or the fact that inflation is clearly in the rearview mirror,” Roth said.
— CNBC’s Michael Bloom contributed reporting.