US CPI data for June, released by the BLS this morning, appear to set the stage for the Federal Reserve to start cutting rates as early as September. Headline CPI, which had been unchanged in May, actually fell by 0.1 percent in June, lowering the year-on-year increase to 3.0 percent from May's 3.3 percent reading. The monthly decline was mainly the result of a fall in gasoline prices. Core CPI (i.e. ex food and energy) also eased marginally in June, rising 0.1 percent after a gain of 0.2 percent in May. This lowered the year-on-year increase to 3,3 percent, the lowest reading for any month since April 2021.
Although Chair Jay Powell continues to warn that the Fed needs to see further evidence that inflation is moving sustainably toward the 2 percent target, today's data strongly suggest that things are heading in the right direction. In addition to the slowing rise in CPI, the Fed must also take account of the gradual loosening in labor market conditions, reflected in both the non-farm payrolls report and job vacancy data. The lack of any apparent upward pressure on wages should also make the Fed's decisions easier.
At the most recent FOMC meeting in June, the so-called "dot plot" suggested that the consensus of FOMC members now looked for only one or two 25 basis point rate cuts this year. Assuming the next couple of months do not bring a sudden reversal in the recent positive trends, rate cuts in September and December now seem to be the likeliest scenario.
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