Evelyn Reynolds

The monthly inflation rate dipped in June, providing further cover for the Federal Reserve to start lowering interest rates later this year.
The consumer price index, a broad measure of costs for goods and services across the U.S. economy, declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years, the Labor Department reported Thursday. The all-items index rate fell from 3.3% in May, when it was flat on a monthly basis.

Excluding volatile food and energy costs, so-called core CPI increased 0.1 % monthly and 3.3% from a year ago, compared to respective forecasts for 0.2% and 3.4%, according to the report from the Bureau of Labor Statistics.
The annual increase for the core rate was the smallest since April 2021.
A 3.8% slide in gasoline prices held back inflation for the month, offsetting 0.2% increases in both food prices and shelter. Housing-related costs have been one of the most stubborn components of inflation and make up about one-third of the weighting in the CPI, so a pullback in the rate of increase is another positive sign.

Stock market futures rose following the release while Treasury yields tumbled.
In addition to the pullback in energy prices and the modest increase for shelter, used vehicle prices decreased 1.5% on the month and were down 10.1% from a year ago. The item was one of the main drivers in the initial surge in inflation back in 2021.
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The U.K. economy grew by 0.4% in May, flash figures published by the Office for National Statistics showed on Thursday.
The British pound jumping to a four-month high against the U.S. dollar after the announcement.
The broad-based recovery will be welcomed by the newly-elected Labour Party, as Prime Minister Keir Starmer undertakes his first week on the job.

City of London skyline on 10th June 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government district that contains the primary central business district CBD of London. The City of London is widely referred to simply as the City is also colloquially known as the Square Mile.
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LONDON — The U.K. economy grew by 0.4% in May, flash figures published by the Office for National Statistics showed on Thursday, with the British pound jumping to a four-month high against the U.S. dollar after the announcement.
Gross domestic product came in above the 0.2% monthly expansion forecast by a Reuters poll of economists.

The British economy exited a shallow recession in the first quarter of the year, then flatlined in April.
The nation’s dominant services sector showed continued growth of 0.3% in May, as output in both production and construction rebounded from losses, rising by 0.2% and 1.9%, respectively.
Sterling was 0.14% higher against the U.S. dollar at $1.2863 by 8:30 a.m. in London — the highest level for the British currency since March 8, 2024, according to LSEG data.
The broad-based recovery will be welcomed by the newly-elected Labour Party, as Prime Minister Keir Starmer undertakes his first week on the job.
Goldman Sachs last week upgraded its growth forecast for the U.K. following left-of-center Labour’s thumping victory in the country’s general election. The party campaigned on a platform that centered on boosting economic growth, housing and planning.

The party’s large parliamentary majority and business-friendly messaging have led analysts to describe the government as generally supportive of U.K. assets.
In a note, Ashley Webb, U.K. economist at Capital Economics, underlined the recent trend of British GDP increases in recent months — barring the lack of growth in April — “which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade.”
Price rises in the U.K. have cooled from a 41-year high of 11.1% in October 2022, all the way down to the Bank of England’s 2% target in May this year. The performance has raised expectations for a coming interest rate cut from the Bank of England.
However, the BOE continued to strike a cautious tone at its June meeting even after its peers at the European Central Bank began their own path of interest rate cuts, warning that key indicators of inflation persistence in the U.K. “remained elevated.” Markets remain roughly evenly split on the prospect of a cut at its August meeting.

Labour agenda

It will now be up to the new government to build momentum behind the latest economic growth figures, Muniya Barua, deputy chief executive at industry campaign group BusinessLDN, said in emailed comments.
“With the public finances stretched, ministers should follow its flurry of recent pro-growth announcements by prioritising high-impact, low-cost measures which taken together could help unlock much-needed private investment,” Barua said, citing an overhaul of the apprenticeship system and scrapping stamp duty on share transactions.
New Finance Minister Rachel Reeves last week said Labour would introduce mandatory house-building targets, lift the ban on new onshore wind farms in England and reform planning rules. On Wednesday she announced the launch of a £7.3 billion ($9.4 billion) national wealth fund targeted at attracting private sector investment in U.K. infrastructure projects.
The business community now awaits Labour’s first fiscal statement, which is expected no earlier than mid-September, Lindsay James, investment strategist at Quilter Investors, said in a note.
This “should make both taxation and spending plans clearer. This will allow businesses to better plan ahead and could in turn reinvigorate their want to invest,” James said.
“However, this would take time to feed through, and until there is a better understanding of what is to come, we are unlikely to see any meaningful acceleration in GDP growth,” she added. More

Economists surveyed by Dow Jones are looking for CPI to rise 0.1% from May, and 3.1% from the same month a year before.
Thursday’s report comes after Federal Reserve Chair Jerome Powell delivered two days of testimony on Capitol Hill this week.
Shelter and medical care services could be key areas to watch, according to one chief investment officer.

An Aldi supermarket in Alhambra, California, on June 27, 2024.
Eric Thayer | Bloomberg | Getty Images

A widely anticipated inflation report on Thursday may solidify expectations for the Federal Reserve to cut interest rates in coming months.
The consumer price index, or CPI, report for June is due out at 8:30 a.m. ET. Recent economic releases have suggested that inflation and economic growth are both cooling, including last week’s report that unemployment in June ticked up to 4.1%.

Thursday’s report comes after Federal Reserve Chair Jerome Powell delivered two days of testimony on Capitol Hill this week. The central bank chief did not indicate when exactly rate cuts will begin. However, Powell did say the Fed sees the risks to the economy as more in balance between inflation and recession and that the central did not need to wait until inflation hit the 2% level to cut rates.

What to watch for

Economists surveyed by Dow Jones are looking for CPI to rise 0.1% month over month, and 3.1% year over year. The core CPI, which strips out more volatile food and energy prices, is expected to rise 0.2% from May and 3.4% since June last year.
In May, CPI was unchanged month over month and up 3.3% on an annual basis.
Focusing on the trends of unemployment and inflation could bolster the case for rate cuts, said Matt Brenner, managing vice president, investments and product management at MissionSquare Retirement.
“The level on inflation is still elevated relative to the Fed’s [2%] target. The level on unemployment is still very low historically at 4.1%. But the trend in both is that unemployment is gradually starting to pick up and that inflation continues its downward trajectory,” said Brenner.

“For some time the Fed has been more focused on levels, and now it seems that they may be starting to tilt more towards a focus on trend. And if that’s the case, then the chances of a rate cut go up,” Brenner added.
The price changes in the components that make up the CPI index will also be a focus on Thursday, especially if the number comes in different from expectations. Shelter and medical care services could be key areas to watch, said Wilmington Trust Chief Investment Officer Tony Roth.
Both shelter and medical services are also key parts of the personal consumption expenditures index, the Fed’s preferred inflation measure, rather than CPI.
“We’ve seen medical services [be] pretty tame, and that’s important because medical services makes up a much bigger portion of the PCE, which is the more important of the two inflation prints,” Roth said.

Market effect

The CPI report comes as markets are on the upswing.
Stocks and bonds have both rallied in July as traders grow more confident in a rate cut sometime this year. The S&P 500 crossed 5,600 for the first time on Wednesday.

Stock chart icon

The stock market has rallied in July, with the S&P 500 hitting another record high on Wednesday.

Fed funds futures pricing shows traders are expecting the Fed to hold rates steady at its meeting later this month, and then cut in September, according to the CME FedWatch Tool. A month ago, the chances of another pause in September were close to a toss-up, according to the same tool, which uses 30-day fed funds futures to come up with implied probabilities.
The expected hold in July could keep Thursday’s CPI report from being a big market mover, Bank of America rates strategist Meghan Swiber said in a note to clients Wednesday.
“Cooling activity and limitations on near-term cut pricing should confine market response in either direction,” Swiber said.
However, Wilmington Trust’s Roth said stocks could rally if the inflation reading is cooler than expected because some investors have not shaken their fears from earlier this year, when inflation briefly ran hotter.
“I don’t think that the market has fully appreciated the weakness in the economy, or the fact that inflation is clearly in the rear view mirror,” Roth said.
— CNBC’s Michael Bloom contributed reporting.

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Federal Reserve Chair Jerome Powell on Tuesday expressed concern that holding interest rates too high for too long could jeopardize economic growth.
“Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell said in remarks for appearances this week on Capitol Hill.

Jerome Powell, chairman of the US Federal Reserve, during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, US, on Tuesday, July 9, 2024.
Tierney L. Cross | Bloomberg | Getty Images

Federal Reserve Chair Jerome Powell on Tuesday expressed concern that holding interest rates too high for too long could jeopardize economic growth.
Setting the stage for a two-day appearance on Capitol Hill this week, the central bank leader said the economy remains strong as does the labor market, despite some recent cooling. Powell cited some easing in inflation, which he said policymakers stay resolute in bringing down to their 2% goal.

“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he said in prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
The commentary coincides with the approaching one-year anniversary of the last time the Federal Open Market Committee raised benchmark interest rates.
The Fed’s overnight borrowing rate currently sits in a rage of 5.25%-5.50%, the highest level in some 23 years and the product of 11 consecutive hikes after inflation hit its highest level since the early 1980s.
Markets expect the Fed to begin cutting rates in September and likely following up with another quarter percentage point reduction by the end of the year. FOMC members at their June meeting, however, indicated just one cut.

‘Strengthen our confidence’

In recent days, Powell and his colleagues have indicated that inflation data has been somewhat encouraging after a surprise jump to start the year. Inflation as judged by the Fed’s preferred personal consumption expenditures price index was at 2.6% in May after peaking above 7% in June 2022.

“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell said. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”
The statement is part of congressionally mandated semiannual updates on monetary policy. After delivering the remarks, Powell will face questioning from Senate Banking Committee members on Tuesday, then the House Financial Services Committee on Wednesday.
In past appearances, Powell has veered away from making dramatic policy announcements while having to dodge politically loaded questions from committee members. The questioning could get contentious this year as Washington is on edge amid a volatile presidential campaign.
Several Democratic committee members urged Powell to lower rates soon.
“I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the undo the progress we’ve made on creating good paying jobs,” Sen. Sherrod Brown (D-Ohio), the committee chair, told Powell. “If unemployment trends upward, you must act immediately to protect Americans jobs. Workers have too much to lose if the Fed overshoots [its] inflation target and causes a completely unnecessary recession.”
However, Powell has stressed that the Fed is not political and does not get involved in taking policy sides outside of its own roles. In his prepared remarks, he emphasized the importance of “the operational independence that is needed” for the Fed to do its job.
His other remarks focused squarely on the stance of policy in relation to the broader economy. Recent data has shown the unemployment rate creeping higher and broad growth as measured by gross domestic product receding. Both the manufacturing and services sectors reported being in contraction during June.
But Powell said the data is showing that “the U.S. economy continues to expand at a solid pace” despite the deceleration in GDP.
“Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending,” he said.

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