(Bloomberg) — The monthly U.S. consumer price index is expected to show a second consecutive increase in underlying inflation at its slowest rate since last summer, strengthening the case for the Federal Reserve to cut interest rates in September.
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Figures due to be released by the Bureau of Labor Statistics on Thursday are expected to show that a key measure of prices excluding food and energy rose just 0.2% in June for the second straight month, according to the median estimate in a Bloomberg survey. The broader Consumer Price Index is expected to rise a smaller 0.1%, helped by lower gasoline prices.
Such results would strengthen financial market expectations that the Fed will begin cutting interest rates at its September policy meeting, taking the first step toward unwinding its most aggressive monetary policy since the early 1980s.
“Bloomberg Economics expects the June Consumer Price Index report to be, to borrow Fed Chairman Jerome Powell’s phrase for recent inflation, ‘very good,'” Bloomberg economists Anna Wong, Chris Collins and Stuart Paul said Wednesday in previewing the numbers. “This should set the stage for the Fed to begin cutting rates in September.”
Key elements to note in the report include:
Rent in New York
June appears to have marked the beginning of a delayed easing in rent increases, which have kept monthly inflation generally high in 2024. A measure known as “owner-equivalent rent,” which accounts for 26.6% of the Consumer Price Index (CPI), has risen an average of 0.41% per month so far this year, down from an average monthly increase of 0.27% in 2019.
The slowdown would have already been visible in the May data if not for an extraordinary spike in the New York City metropolitan area, where the OER rose 1.8%, the largest in the past 30 years. Because New York City is the nation’s largest metropolitan area, that movement alone boosted the national OER reading in May by about 8 basis points, according to Omar Sharif, president of Inflation Insights.
Steve Reed, the BLS economist responsible for the CPI numbers, said the anomaly was due to a problem with collecting quotes and noted that the June data was based on a different sample that rotates every six months.
“The few citations that we collected in a particular area were in some sense magnified in importance because there were a significant number of citations that we didn’t collect,” Reed said. “Essentially, it represents noise.”
Secondhand car
Prices of core goods have fallen in 11 of the past 12 months after rising 16.2% between February 2020 and May 2023. Many forecasters expect prices to fall modestly again in June, led by used cars, one of the biggest items in the core goods basket.
Most of the measures of used-vehicle wholesale prices that economists use as leading indicators fell in June, but a cyber attack on dealerships nationwide has heightened uncertainty about what the CPI numbers will show. Any big swings are likely to be reversed in July.
“If the attacks lead to a shift in sales from new to used car dealerships, this could temporarily put upward pressure on used-car prices despite lower wholesale prices,” Citi economists Veronica Clark and Andrew Hollenhorst wrote in a July 8 note.
“Meanwhile, auto prices (both new and used) typically rise in June, but negative seasonal factors offset this increase,” the researchers said. “If the attacks prevent dealers from updating their prices (and therefore from raising prices in line with seasonal patterns), this could pose a downside risk to seasonally adjusted prices.”
Automobile Insurance
Prices for food, energy and services excluding rent — an area closely watched by Fed officials — fell in May for the first time since 2021, driven in part by a drop in auto insurance costs.
Auto insurance has been one of the most closely watched components of the CPI this year, with many forecasters expecting it to return to an upward trend in June.
“We believe it would be a mistake to judge trends from previous releases,” Morgan Stanley economists led by Diego Anzoategui said in a July 5 note.
“We expect deflation to come as insurers normalize profits, but we are not seeing a significant slowdown in premium applications from insurers. Insurers are still asking regulators to significantly increase premiums.”
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