Tuesday’s Producer Price Index (PPI) data highlights the growing case for Federal Reserve rate cuts, setting the stage for one of the most critical data points influencing future interest rate policy: July’s Consumer Price Index (CPI).
The inflation report, scheduled for release at 8:30 a.m. ET on Wednesday, is anticipated to reveal a headline inflation rate of 3.0%, unchanged from the previous month.
Consumer prices are projected to have increased by 0.2% over the previous month, a slight uptick from the previous month’s decline of 0.1%, largely attributed to expected rises in energy prices.
On a “core” basis, excluding the more volatile food and gas costs, July’s prices are expected to have risen by 3.2% compared to the previous year, a slight slowdown from June’s 3.3% annual increase. Monthly core prices are expected to rise by 0.2% in July, up from a 0.1% increase in June, as per Bloomberg data.
“The CPI for June was unexpectedly low,” noted Bank of America economist Michael Gapen in a pre-report analysis. “We anticipate a reversal of some of that surprise in July.”
June marked the first instance since May 2020 that monthly headline CPI was negative and the slowest annual price increase since March 2021.
While July’s inflation figures are unlikely to reach the lows of June, they align with the deflation trend and are expected to meet the Federal Reserve’s criteria for initiating rate cuts in September, according to Gapen.
Core inflation remains persistently high due to increased costs in shelter and core services such as insurance and healthcare.
Shelter prices are predicted to rebound from June’s slowdown, with rent and owners’ equivalent rent indexes showing their smallest monthly increases since August 2021. Owners’ equivalent rent represents the hypothetical rent a homeowner would pay for their property.
Non-housing services experienced a decline in June, primarily due to a significant drop in airfares. However, the decline in airfares is expected to be less pronounced in July, as per Bank of America’s Gapen.
“Although services wage inflation may ease over time, sustained deflation is unlikely,” Gapen cautioned.
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