After what seemed an eternity of sequential CPI beats, the tide has finally turned according to the BLS, and today's inflation print came below expectations across all metrics in both headline and core, MoM and YoY. More importantly, this was the 12th straight month of YoY declines, matching the longest streak of drops recorded during the Great Depression.
The weak core CPI reading for June – matching our forecast, but lower than the consensus — is likely the start of a string of readings over the next few months that will show annualized core inflation running close to the Fed’s 2% target. The Fed is all but certain to hike by 25 basis points in July, but the favorable CPI report will bolster voices on the FOMC arguing that July’s hike should be the final one — matching our baseline.
And while expectations were for a dovish report (as we correctly previewed in "CPI Preview: "Dovish Prints More Likely Than Hawkish" As Headline Inflation Slides To 3%"), and the final number came in even weaker than expected pushing the inflation arrow in the right direction, the Fed has clearly communicated they believe the risks of being too dovish outweigh the risks of being too hawkish.
As such as Bloomberg chief economist Anna Wong writes, the weak core CPI reading for June "is likely the start of a string of readings over the next few months that will show annualized core inflation running close to the Fed’s 2% target" and while the Fed is all but certain to hike by 25 basis points in July, the favorable CPI report will bolster voices on the FOMC arguing that July’s hike should be the final one.
Below we recap several other kneejerk reactions from Wall Street strategists and traders.
Here is Neil Birrell, CIO at Premier Miton Investors:
Beyond the next meeting, matters are less clear and the chances of the Fed pulling off what many thought was impossible are rising; growth is robust and inflation is falling.
Andrew Hunter at Capital Economics:
The muted 0.2% m/m rise in core consumer prices in June won’t stop the Fed from hiking rates again later this month, but it supports our view that the downward trend in core inflation is set to accelerate over the second half of the year.
Jay Hatfield, CEO of Infrastructure Capital Advisors:
This CPI release demonstrates that inflation is rapidly declining, with PPI likely to come in close to zero on a year over year basis. And while the Fed will commit yet another policy error by raising rates in July, it will likely pause in September as inflation data continues to decline and the economy decelerates.
Megan Horneman, CIO at Verdence Capital Advisors:
Even if this print came in softer than expected, it’s not still not enough for the Fed to say their job is done. I don’t think they are going to be cutting... The market is too optimistic about the path and timing on rate cuts. We think they are going to stay higher for longer, they told us that.
David Russell, Vice President of Market Intelligence at TradeStation
This report suggests that inflation is easing as the optimists hoped, with shelter costs following the bulls’ script. It’s now easier to anticipate further improvements because of its lagging nature. Other categories like transportation and used-car prices bolster arguments for the Fed pausing soon. This is no longer just a commodity-driven story. Slowly but surely the tsunami of inflation is receding. With the Fed’s target rate now more than 200 basis points above headline CPI, investors might think yields have indeed peaked.
Rubeela Farooqi, chief US economist at High Frequency Economics:
The three parts of inflation Chair Powell has highlighted, core goods, core services, and core services ex-shelter all slowed to end the second quarter. While inflation remains elevated, the deceleration will be welcome news to policymakers. But these data are not likely to change the outcome of the July meeting, with a 25-bps rate hike most likely. As for the future path of policy, incoming information on inflation, the labor market as well as considerations about credit conditions will determine whether the FOMC is done raising rates or if more tightening is needed. Based on our current assessment of inflation and the labor market, after hiking in July, we think the FOMC is likely to maintain rates at 5.4%, through year-end.
Anna Wong and Stuart Paul of Bloomberg economics:
The weak core CPI reading for June – matching our forecast, but lower than the consensus — is likely the start of a string of readings over the next few months that will show annualized core inflation running close to the Fed’s 2% target. The Fed is all but certain to hike by 25 basis points in July, but the favorable CPI report will bolster voices on the FOMC arguing that July’s hike should be the final one — matching our baseline.
Chris Low, of FHN Financial:
Can inflation stay this low? At the moment, it is unlikely, especially with the economy now growing across a wider front. Strong real income growth undermines the effectiveness of tightening, and government spending is still providing a powerful boost to growth. We expect little further progress reducing inflation through the rest of this year.
Gregory Daco, chief economist at EY:
Today’s numbers mean the Fed will hike this month -- and be done. Given our outlook, and the Fed’s communicated intent to slow the pace of tightening by going at every other meeting, we don’t foresee any additional rate hikes beyond July.
Matt Miskin, co-CIO for John Hancock Investment Management:
There’s a lot to like in this CPI report. It solidified our view of one more rate hike of the cycle and a pause after that. Sure there are things that can change from here, but if further disinflation comes in, it’s just going to continue to cause yields to fall and pricing out a lot of that ‘higher for longer’ that had been priced back in over the last couple months.
Erik Norland, senior economist at CME Group:
[C]ore inflation has remained at the relatively high level of 4.8% year on year largely because of a 7.8% rise in ‘owners’ equivalent rent’ which assumes that homeowners pay themselves rent. If one excludes owners’ equivalent rent and calculates core US CPI in the same manner as the European Harmonized CPI, core inflation would be running at only about 3% YoY.
Robert Tipp, chief investment strategist at PGIM Fixed Income,
Tipp tells Bloomberg TV he is not ready to call the widely expected rate hike in July as the last. While it “feels good” to get a print like this, he said he thinks the Fed will not risk having inflation reaccelerate.
Ian Lyngen of BMO Capital Markets:
It’s an impressive read and one that has confirmed the effectiveness of Powell’s actions and offers evidence that inflation’s period of stickiness is coming to an end. This is a good report for the Fed and suggests July’s move will be a dovish hike.
Bloomberg Economics’ Stuart Paul:
Just 42% of spending categories show annualized monthly price growth above 4%, down from 69% in February 2022. The share of categories experiencing outright deflation has been growing, with 44% of spending categories experiencing monthly price declines. Increased inflation diffusion was critical for identifying inflation momentum in mid-2021, and the turning of the tides so far this year supports our view that disinflation in important categories like housing — and deflation in others, such as core goods — will help the Fed achieve its inflation mandate. Leaning against labor demand to rein in inflation in core services ex-housing will be critical for the Fed to keep inflation near the target over the long run. Rents rose 0.46% month on month and OER rose 0.45%, far lower than the 0.65%-0.8% pace they had maintained since mid-2022 until this March. We expect the sharp declines in measures of new-lease prices since 2021 to show up more clearly in the CPI rent measures in coming months. With rent components accounting for about 33% of CPI — and about 15% of the Fed’s preferred PCE price index — current indications are that these critical components are on track to return to pre-pandemic rates, smoothing the Fed’s path to the 2% inflation target.
Ryan Sweet at Oxford Economics
The Fed has painted itself into a corner as Fed officials’ communication has signaled that another rate hike this month is essentially a slam dunk. However, the new data could give the Fed reason to debate whether any further rate hikes after this month are needed.
Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office
This print is welcome news and sets an optimistic tone as earnings kick off. As for the Fed’s rate path the inflation arrow may be pointing in the right direction, but the Fed has clearly communicated they believe the risks of being too dovish outweigh the risks of being too hawkish.
