Consumer price index data for June showed that core inflation cooled more than expected last month as services inflation turned mild — even housing costs. The S&P 500 reversed solidly lower, a sign that the strong bull market may take a breather, but Treasury yields tumbled as Wall Street celebrated the implications for Federal Reserve rate cuts.
CPI Inflation Report Hits And Misses
The overall consumer price index unexpectedly dipped 0.1% on the month vs. +0.1% forecasts. The 12-month CPI inflation rate fell to 3% from 3.3% in May.
The core CPI, which strips out volatile food and energy prices, rose just 0.1% vs. May levels, cooler than 0.2% forecasts. The 3.3% 12-month core CPI inflation rate, down from May's 3.4%, undershot 3.5% expectations. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
On an unrounded basis, the core CPI rose just 0.06% in June. That's the smallest increase since January 2021.
Goods prices fell 0.1% on the month and 1.8% from a year ago. Prices for new vehicles fell 0.2% from May and 0.9% from June 2023, the biggest year-over-year decline since May 2018.
Core services prices rose just 0.1%, the least since August 2021, after May's tame 0.2% increase.
Overall shelter prices rose 0.2%, amid a 2.5% decline in hotel and motel rates. Still, 0.3% increases in primary rent and owner's equivalent rent also were the smallest increases since August 2021.
Transportation services prices fell 0.5% for the second month in a row as airline fares fell 5%.
Stock Market Flashes Biggest Warning In A Year
Jobless Claims
Initial claims for jobless benefits unexpectedly fell to 222,000 in the week of July 6 from a revised 239,000 the prior week. However, economists take the data with a grain of salt in July and early August.
Seasonal adjustment for last week's data was complicated by the July 4 holiday, summer breaks for schools and auto-factory retooling.
CPI Vs. PCE Inflation
Keep in mind that the Fed's primary inflation measure, the core PCE price index, often grows more slowly than the core CPI. That happened in May, when the core CPI rose 0.16%, while the core PCE price index edged up just 0.08% — the smallest increase since November 2020.
One big reason for the disparity is that housing costs, which have continued to outpace core inflation as a whole, account for 43% of the core CPI basket but less than 18% of core PCE outlays.
CPI data provides about 70% of PCE price index components, with the rest coming from the producer price index, including prices for health care. PPI data out Friday at 8:30 a.m. will allow economists to sharpen their estimates for June's core PCE price index, which will be released on July 26.
Based on CPI data, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote on Thursday that he tentatively expects a 0.17% increase in the core PCE price index for June.
Prices for food away from home rose 0.4% in June. That is among the categories still seeing elevated inflation. While not part of the core CPI, food services prices are included in the core PCE price index.
Fed Chair Powell Turns More Dovish
Federal Reserve Chairman Jerome Powell told the Senate banking panel on Tuesday that the labor market "appears to be fully back in balance," lowering the bar for interest-rate cuts.
Powell has said for some time that the labor market has cooled. But this time he said it "has cooled really significantly across so many measures."
Since late 2022, Powell has emphasized inflation in nonhousing services as a key to the interest-rate outlook, because wages make up a high percentage of costs for service businesses from health care to haircuts to hospitality. But Powell said on Tuesday that the labor market is "not a source of broad inflationary pressures for the economy now."
That followed Powell's dovish declaration at a European Central Bank forum last week: "We are getting back on a disinflationary path," while adding that more good inflation data is needed.
Fed Rate-Cut Outlook
After the CPI inflation data, markets are pricing in 93% odds of a rate cut by the Sept. 18 Fed meeting, up from 71% before the data. Markets now see 91.5% odds of two quarter-point rate cuts before the end of this year, up from 74%.
Odds of a third quarter-point cut this year jumped to 48% from 27.5%.
Powell has said that unwarranted weakening of the labor market would create more urgency to lower the Fed's key interest rate from restrictive levels. His assessment that the labor market is still "strong" makes clear that we're not there. Yet his view that the labor market is fully balanced between supply of and demand for workers suggests that any further cooling of the labor market could hasten Fed rate-cutting.
S&P 500
The S&P 500 initially edged higher after the June CPI inflation data but reversed to a 0.9% decline in Thursday stock market action. The S&P 500 rose 1% in Wednesday stock market action, the biggest gain of its seven-session streak. The S&P 500, which notched its 37th record high this year, has climbed 17.1%% in 2024.
The 10-year Treasury yield fell eight basis points to 4.20%, near a four-month low.
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