U.S. inflation pressures eased notably last month, data indicated Thursday, adding further fuel to market bets on a Federal Reserve interest rate cut in mid-September.
The Commerce Department said its headline Consumer Price Index for the month of June was pegged at an annual rate of 3%, down from the 3.3% pace recorded in May and just inside Wall Street forecasts of a 3.1% reading.
The June reading, in fact, matched the lowest level since March of 2021, although the headline print was also 3% in June of last year.
On a monthly basis, price pressures fell 0.1% from May, in one of the largest declines in more than three years, thanks in part to a 4% decline in gasoline prices.
So-called core inflation, which strips out volatile components like food and energy, slowed to an annual rate of 3.3%, the lowest in more three years and also better than Wall Street's 3.4% forecast.
The monthly reading of 0.1% was also inside Wall Street forecasts and down from the final May reading of 0.3%.
"The latest inflation numbers put us firmly on the path for a September rate cut," said Seema Shah, chief global strategist at Principal Asset Management.
"The smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1’s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year."
"Having said that, a July policy cut is still off the table," she added. "By September, however, they will likely have a series of data prints to support a rate reduction. For now, the combination of resolute jobs data and slowing inflation is an all-out positive for equities."
U.S. stock stocks were modestly firmer following the data release, with the S&P 500 rising 7 points, or 0.13%, from last night's record close.
Related: Goldman Sachs on 'correction watch' as stocks track CPI, Powell shift
The Dow Jones Industrial Average, meanwhile, gain 82 points while the rate-sensitive Nasdaq slipped 15 points from last night's record peak.
Benchmark 10-year Treasury note yields fell 9 basis points following the data release to change hands at 4.197% while 2-year notes were pegged 11 basis points lower at 4.511%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.84% lower at 104.171.
'More good data' for Fed Chairman Powell?
“Elevated inflation is not the only risk we face,” Fed Chairman Jerome Powell told lawmakers on the Senate Banking Committee Tuesday as part of his semiannual testimony on Capitol Hill.
“The latest data show that labor-market conditions have now cooled considerably from where they were two years ago," he added. "And I wouldn’t have said that until the last few readings.”
Broader economic growth is also slowing, with the Atlanta Fed's GDPNow tool suggesting a second-quarter pace of around 1.5%, just barely ahead of the 1.3% gain recorded over the year's first three months.
Mindful of that slowdown, Powell told lawmakers that the economy faces "two-sided risks," both of which are tied to Fed decision-making.
"If we loosen policy too late or too little, we could hurt economic activity," Powell said. "If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks."
Dovish: In month/month terms, CPI #inflation -0.1% vs. 0% prior; core +0.1% vs. +0.16% prior pic.twitter.com/1oRZxz7VV4
— Liz Ann Sonders (@LizAnnSonders) July 11, 2024
CME Group's FedWatch now suggests a 10% chance of a July rate cut but pegs the odds of a September reduction at around 85%, up from 70% prior to the data release.
"The Fed is in a tug of war with the Treasury, which is spending lots of money and arguably adding to inflation," said Skyler Weinand, chief investment officer at Regan Capital in Dallas. "At the current pace of the inflation slowdown, it may be 6 to 8 months before we get to the mystical 2% inflation target the Fed is waiting for."
"We believe investors are underestimating the risk that the Fed raises interest rates in the near term," Weinand added.
"If we were to see a few back-to-back readings that show a reacceleration in inflation, the Fed's next move might be an interest rate hike, as Main Street is getting pummeled from high prices."
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