June CPI report: Easing inflation paves a clear path to a September cut

Market response

July 11, 2024 | 2 min read
Seema Shah
Chief Global Strategist
The June CPI reading puts the Federal Reserve (Fed) on the path for a September rate cut. Not only is this the second consecutive weaker-than-expected reading, but June marks the first month since May 2020 with a negative monthly headline inflation reading, and the smallest monthly core inflation increase since August 2021. June’s number shows a broad weakening in price pressures and is a convincing and consistent sign that inflation has resumed its downward path. Provided those signs persist, a start to the policy easing cycle is approaching.

Report details:

  • Headline CPI fell from 0% month-on-month in May to -0.1% in June. This is the first time since COVID that headline inflation has been negative. Core inflation slowed from 0.2% last month to 0.1% this month— the lowest print since August 2021.
  • Annual headline and core inflation have now eased to 3.0% and 3.3% respectively, both lower than the consensus had expected. On a three-month annualized basis, core CPI is down to 2.1%, surely putting it close to the Fed’s likely “comfort zone” that would open the door to rate cuts.
  • Gasoline prices dropped 3.8% in June, contributing to the monthly fall in headline inflation. Core goods inflation declined 0.1% in June, driven by a drop in both new and used car prices, marking the fourth consecutive monthly drop. Core services inflation remained positive, but eased in June.
  • Within services, the long awaited fall in shelter inflation finally arrived, registering the smallest increase since 2001. Owners’ equivalent rent, the largest component of CPI, posted its smallest monthly increase since August 2021.
  • The Fed will be particularly encouraged by the second consecutive decline in the all-important supercore CPI measure which strips out shelter from core services.

Policy outlook

June’s data shows multiple components of inflation easing to their weakest levels since COVID. Not only should this give the Fed confidence that 1Q’s hot CPI readings were just a bump in the road, but it should reinforce Fed Chair Powell’s most recent comments that the balance of risks is shifting.

Having said that, a July policy cut is still off the table. Not only would it spark questions of "what do they know about the economy that we don't know?" but the Fed still needs to gather additional evidence of waning price pressures to be absolutely certain of the inflation path. By September, however, they will likely have a sufficient series of data prints to support a rate reduction.

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