Headline inflation cooled sharply last month to beat economists' forecast as prices rose on an annual basis at the slowest pace in more than two years, the June Consumer Price Index (CPI) revealed Wednesday.
Core inflation, which excludes volatile food and energy costs and is considered to be a better predictor of future prices, remained higher than policymakers would like, but it too surprised to the downside.
Ultimately, the data suggest that the Federal Reserve is making progress in its fight against the worst bout of inflation to hit the U.S. economy in four decades. Experts caution, however, that the June CPI report is unlikely to prevent the central bank from raising interest rates at the next Fed meeting.
For the record, headline CPI rose 3% last month on an annual basis, the Bureau of Labor Statistics said Wednesday, or the lowest reading since March 2021. Economists forecast annual inflation to hit 3.1% in June. On a monthly basis, prices rose 0.2% in June, vs expectations for 0.3%.
Core CPI, which is of particular interest to the Fed's rate setting group known as the Federal Open Market Committee (FOMC), rose 4.8% from a year ago. Economists were looking for core CPI to increase by 5%. Month-to-month, core CPI increased 0.2%, which was lower than the 0.3% consensus estimate.
Although inflation remains above the Fed's 2% target, the June CPI data add to a mounting pile of evidence that it is becoming increasingly under control. It's notable that core CPI increased at the slowest rate since late 2021.
Regardless, the FOMC is widely expected to raise interest rates by a quarter of a percentage point (25 basis points) when it meets later this month. The question now, experts say, is whether the central bank will enact another rate increase before the end of the year.
The Fed telegraphed two more rate hikes before the end of 2023 when it paused in its campaign of rate increases in June. Yet Fed Chair Jerome Powell has always maintained that future policy will be "data dependent" – and this latest bit of data would appear to argue against back-to-back rate hikes.
With the June CPI report now in the books, we turned to economists, strategists, investment officers and other experts to get their takes on what the inflation data means for markets, macroeconomics and monetary policy going forward. Below please find a selection of their commentary, sometimes edited for brevity or clarity.
Expert takes on the CPI report
"June's CPI report was better than what markets were expecting with the year-over-year rate of inflation slowing down to 3.0%, the lowest reading since March of 2021, while the core CPI year-over-year slowed down to 4.8%, the lowest since November 2021. However, as the report indicates, shelter costs remained strong during the month and represented more than 70% of the increase in the monthly index. This means that if, as we expect, shelter costs start to weaken considerably during the second half of the year, the prospects for much lower inflation readings are looking promising. If we don't have much lower readings for shelter cost and also base effects, we may see higher year-over-year inflation until the end of this year." – Eugenio Alemán, chief economist at Raymond James
"This was a much better than expected CPI report. It showed that the Fed's tightening efforts continue to exert disinflation pressure. And, perhaps for the first time in this rate-hike campaign, the light of price stability is starting to shine more brightly at the end of the tunnel. This is the prerequisite for an eventual, lengthy, Fed policy pause." – Michael Gregory, deputy chief economist at BMO Capital Markets
"The encouraging trend in consumer prices will provide additional fodder for markets to debate the terminal fed funds rate. Overall, the deceleration in core prices will be happily received by investors. Yields on the 2-year treasury fell over 10 basis points on the news. This supports our view that bond yields will likely be lower by the end of the year." – Jeffrey Roach, chief economist at LPL Financial
"The trend that investors have been waiting for is finally here: softer core CPI prints or hints of pre-COVID normality. The downside surprise on both core and headline numbers allows us to avoid a terminal rate that is gradually scaling up. While it is only one number, this will buy investors time and give them the opportunity to catch their breath. It is enough on a standalone basis for the market to put in question the Fed's dot projections of two additional hikes left this year and consequently pull interest rate volatility down." – Alexandra Wilson-Elizondo, deputy chief investment officer of multi asset solutions at Goldman Sachs Asset Management
"All in, nothing here for the Fed to be worried about. While the decision to go in July appears to have been locked-in prior to the report, the data pour cold water on the 'higher for longer' narrative that has returned to the spotlight following last week's FOMC minutes (pricing for a second hike post-July is being removed from the market). We have moved from inflation to disinflation and we still believe that, in the next year, deflation will emerge as the primary theme." – David Rosenberg, founder and president of Rosenberg Research
"The Fed cannot say 'job done' but a declining trend in core inflation alleviates some pressure on the Fed to feel like they need to do a lot more. Today's number keeps alive the hope that we can see inflation trend back towards the Fed's 2% target without seeing unemployment rise and the economy contract. The risks to the economy remain in place, but today's data should provide the Fed with an indication they might not have to do much more." – Steve Wyett, chief investment strategist at BOK Financial
"If it weren't for the Fed's guidance at the last meeting to expect two more hikes by the end of the year, this report would be sufficient to cause the FOMC to wait out any more hikes while the economy evolves in its favor. There's a real chance that the Fed will have to pivot its guidance on July's meeting. The doves on the FOMC who were urging patience have been vindicated." – Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co.
"The key to this CPI report was that we saw a drop in both the headline number, and more importantly, core inflation, which is what the Fed is focused on. Shelter inflation was one of the largest contributors to core inflation, rising 0.4% in June. The shelter component is known to lag actual rents and home prices by several months, and we expect softness in this category will help the Fed continue to push core inflation lower going forward. The drop in the core CPI from 5.3% to 4.8% year-over-year is encouraging. While we think it is still likely that the Fed will raise rates 25 basis points at their meeting later this month, we think this will be the last hike in this cycle." – Ivan Gruhl, co-chief investment officer at Avantax
"The Fed will embrace this report as validation that their policies are having the desired effect – inflation has fallen while growth has not yet stalled. But it most likely won't change their mind to raise interest rates later this month. While the Fed may now feel more comfortable undertaking an extended pause, we doubt a pivot will take place soon, barring some further weakness in the U.S. labor market, and wages in particular." – George Mateyo, chief investment officer at Key Private Bank
"The question that the Federal Reserve is considering is the speed of these declines. The Fed may not believe that inflation is coming down fast enough and may be considering more rate hikes ahead." – Seth Cohan, executive director at The Wealth Alliance
"Today's at-expectation inflation print likely won't affect the Fed's sentiment for their upcoming rate decision, and the bond market is still heavily favoring the probability of a 25 basis point rate increase in July. Notably from today's print, the used car market has begun retracting from its highs last year, but the core reading remained sticky with housing and transportation services still up nearly 8% year-over-year, keeping big purchases out of reach for some consumers." – Ben Vaske, investment strategist at Orion Portfolio Solutions
"This report suggests that inflation is easing as the optimists hoped, with shelter costs following the bulls' script. It's now easier to anticipate further improvements because of its lagging nature. Other categories like transportation and used-car prices bolster arguments for the Fed pausing soon. This is no longer just a commodity-driven story. Slowly but surely the tsunami of inflation is receding. With the Fed's target rate now more than 200 basis points above headline CPI, investors might think yields have indeed peaked." – David Russell, vice president of market intelligence at TradeStation
"The fact we're nearing the 2% level on year-over-year headline inflation is great for investor sentiment, but it'd be premature to call it a green light for full risk-on posture. An ostensibly low inflation reading doesn't erase the trail of destruction left by preceding high single-digit prints and the corresponding (and future) rate hikes, including the lagged pain to come in the form of tightening credit conditions. For the optimists, lower inflation lowers the risk of higher interest rates, which in turn supports the multiple expansion that has boosted U.S. equities year-to-date." – Adam Hetts, global head of multi-asset at Janus Henderson Investors
"In June, both the headline and core CPI rose 0.2% from the previous month, slightly below expectations. Headline inflation is now 3% from a year ago. While this report is very encouraging, nominal GDP or total spending in the economy is still running 'hot.' Because total spending is what ultimately determines whether inflation persists, the Fed needs to further slow nominal GDP growth to make sure that high inflation doesn't make a comeback." – Patrick Horan, economist at the Mercatus Center
"Today's moderating inflation allows for further optionality in upcoming meetings. The market is largely pricing in a rate hike in July following June's 'hawkish skip', with fed funds projections forecasting near a 90% chance of a hike. However, today's soft print signals that the effects of raising rates 5% since the beginning of the hiking cycle are taking hold. Post CPI, the market is moving the 'terminal' fed funds rate lower and raising the probability that a hike in July might be the last of this cycle. We'll focus on Fed Chair Powell's press conference on July 26 for further guidance on the trajectory of future interest rates." – Gargi Chaudhuri, head of iShares Investment Strategy, Americas
"The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July. The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum. The Fed wants to see a bigger margin of slack capacity open up in the U.S. economy, which would show up in slower wage growth and higher unemployment, not just slower CPI." – Bill Adams, chief economist at Comerica Bank
