US Markets
Thursday, July 11th, 2024 1:30 pm EDT
Key Points
- Inflation Rate Decrease: In June, the U.S. monthly inflation rate declined by 0.1% for the first time in more than four years, reducing the 12-month rate to 3%, its lowest level in over three years, potentially allowing the Federal Reserve to lower interest rates later this year.
- Core CPI and Economic Indicators: Excluding food and energy costs, the core consumer price index (CPI) increased by 0.1% monthly and 3.3% annually, both below forecasts. This moderation in inflation, especially with significant decreases in gasoline and used vehicle prices, indicates a positive trend towards the Fed’s 2% annual inflation target.
- Market and Policy Implications: The tame inflation report boosted stock market futures and lowered Treasury yields. It also increased market expectations for a potential rate cut by the Federal Reserve in September, with some traders anticipating multiple cuts by the end of the year, driven by the belief that inflation pressures are easing.
In June, the U.S. monthly inflation rate declined for the first time in over four years, easing pressures and potentially paving the way for the Federal Reserve to lower interest rates later in the year. The consumer price index (CPI), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, dropped by 0.1% from May, bringing the annual rate to 3%, its lowest in more than three years. This marked the first decrease in the monthly rate since May 2020. Excluding volatile food and energy costs, the core CPI saw a modest 0.1% monthly increase and a 3.3% rise from the previous year, slightly below expectations.
The decline in inflation was significantly influenced by a 3.8% decrease in gasoline prices, which helped offset 0.2% increases in both food prices and shelter costs. Housing-related costs, a significant component of the CPI, showed a slowdown in their rate of increase, contributing to the positive outlook on inflation. The stock market responded positively, with futures rising and Treasury yields falling after the report’s release.
Chris Larkin of E-Trade from Morgan Stanley noted that the June inflation data brought the Federal Reserve closer to a potential rate cut in September. Unless inflation indicators rebound significantly, the Fed might see less justification for maintaining current rates. Additionally, used vehicle prices dropped by 1.5% monthly and 10.1% annually, a notable change given their role in the inflation surge of 2021.
The report also indicated a 0.4% monthly increase in real average hourly earnings for workers, though the annual rise was just 0.8%. The Federal Reserve, targeting a 2% annual inflation rate, might view the June CPI data as evidence of prices trending towards their goal. The CPI had peaked above 9% in June 2022, prompting a series of rate hikes that concluded in July 2023. Since then, the Fed has maintained its benchmark rate between 5.25% and 5.50%.
The subdued inflation figures led traders in the fed funds futures market to increase their bets on a rate cut starting in September. Seema Shah of Principal Asset Management suggested that the minimal gain in core CPI since 2021 could bolster the Fed’s confidence that the earlier high inflation readings were temporary, thereby supporting the case for multiple rate cuts within the year. Despite Fed officials previously indicating a likelihood of a quarter percentage point cut this year, market expectations now include an initial cut in September, followed by at least one more by the end of the year, with some even predicting a third cut by December.
In related economic news, the Labor Department reported a decrease in weekly jobless claims to 222,000, the lowest level since June 1, while continuing claims dropped slightly to 1.85 million. This further indicates a strengthening job market, adding another layer of optimism to the economic outlook following the positive inflation report.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html
