The key question for markets this week will be whether the softer US CPI data in May was the restart of the disinflation trend, or something more temporary? Expectations are for the latest inflation data to cement a Fed rate cut at its meeting in September. In fact, we do get to hear from Fed Chair Powell later today, but he is expected to continue his mildly dovish bias, copying his comments last week at the ECB conference in Sintra.
Consensus sees the all-important monthly core reading, which strips out volatile food and energy components, printing at 0.2% in June, for a second straight month. That would mark the smallest back-to-back gains since August last year. That works out to 3.4% for the annual core inflation figure, matching the three-year low in May. The headline figures are predicted to rise 0.1% m/m from a flat prior reading and 3.1% y/y, down two-tenths from the May print.
Detail in the data
Focus will be on core services inflation after the category, excluding energy and shelter, fell sharply last time by 0.5% m/m. That category accounts for roughly 25% of the total CPI basket and was adding 0.1% to 0.2% to overall CPI when it was rising by 0.4%+ during the first few months of the year. Wages have been the prime source of those sticky price pressures and have been fairly benign recently. However, it is not uncommon for core services ex-housing to see large gains after big declines.
Shelter does have a large weighting in the basket too and has been a sticky influence with regular monthly advances of 0.4%+, but these prices do lag. Other drivers of CPI should be relatively benign with gasoline prices knocking a tenth or so off the monthly headline readings.
Market reaction
A hot report would knock September rate cut bets, though there are still two more CPI and PCE reports ahead of the mid-September FOMC meeting. Friday’s softer-than-expected US jobs data raised hopes of a late summer rate cut, with money markets currently pricing in around a 75% chance of a 25bps move.
The dollar sold off last week on weak data. Downside risks in the US economy appear to be intensifying with the best lead indicators for changes in the economic cycle signalling a soft landing. There are roughly 50bps of policy easing priced for this year, so that could go higher if the report comes in cooler, raising the pressure on the Fed to act, with four FOMC meetings remaining in 2024.
