Countdown to US CPI! Bad, okay, or very good?

Forecasters expect that the U.S. CPI report to be released tonight at 20:30 could increase the likelihood of a Fed rate cut in September, as potential inflation is expected to hit the lowest level since last summer.

The median estimate from a survey by foreign media suggests that core CPI inflation, excluding food and energy, is expected to rise by only 0.2% for the second consecutive month in June. The broader overall CPI is expected to show a smaller increase, with a monthly rate of 0.1%, partly due to a decline in gasoline prices.

Such results are expected to reinforce the financial market's expectations of the Fed starting rate cuts at the September policy meeting, marking the first step in ending the most aggressive tightening actions since the early 1980s.

Economists from foreign media, Anna Wong, Chris Collins, and Stuart Paul, stated that, borrowing from Fed Chairman Powell's recent description of inflation data, they expect the June CPI report to be "very good," laying the foundation for the Fed to start cutting rates in September.

Here are the key sub-items worth noting in this report:

Noise from New York rents expected to decrease

Rental costs have been the biggest obstacle for the Fed to bring inflation down to the 2% target. Fortunately, rents in June may finally start to slow down.

Housing costs have kept the overall CPI monthly rate at a high level until 2024. Owners' equivalent rent (OER) accounts for 26.6% of the weight in the CPI, rising on average by 0.41% per month so far this year, compared to an average increase of only 0.27% in 2019.

If it weren't for a 1.8% increase in OER in the New York metropolitan area in May, the slowdown in rents may have already appeared in the May data. Omair Sharif, President of Inflation Insights, stated that just one sub-item from New York, the largest metropolitan area in the U.S., raised the national OER data for May by about 8 basis points.

Steve Reed, an economist at the U.S. Bureau of Labor Statistics responsible for studying CPI data, attributed last month's significant increase to issues encountered in collecting quotes. He also noted that the June data will use a different unit sample, rotated every six months.

Reed said, "The small number of quotes we collect in some areas ended up being amplified because quite a few quotes were not collected properly."

"Essentially indicating the presence of noise."

Cyberattacks make it difficult to judge the trend in car prices

After a cumulative increase of 16.2% in core commodity prices from February 2020 to May 2023, there have been 11 months of decline in the past 12 months. Many forecasters expect a slight decrease in this part of price increases in June, with used cars being one of the largest items in the core commodity basket Economists consider wholesale used car prices as a leading indicator, with most of these prices experiencing a decline in June. However, the network attacks affecting national dealerships have increased the uncertainty of CPI data, and any significant changes could reverse in July. In June, the most commonly used automotive dealership management software in the United States and Canada was hit by a cyber attack, causing over 15,000 dealerships to be unable to sell cars for several days.

Citigroup economists Veronica Clark and Andrew Hollenhorst stated in a report on July 8:

"If this cyber attack leads to sales shifting from new car dealerships to used car alternatives, despite the drop in wholesale prices, used car prices may temporarily maintain upward pressure."

"On the other hand, car prices (new and used) typically rise in June, with negative seasonal factors offsetting this increase," they said. "If this cyber attack causes dealerships to be unable to update prices (rather than raising prices based on seasonal patterns), this could lead to downside risks for seasonally adjusted prices."

Car insurance prices may rise again

In May, core service prices excluding food, energy, and rent recorded their first decline since 2021, partly due to a decrease in motor vehicle insurance costs. Car insurance is one of the key components of CPI this year, and many forecasters expect it to rise again in June.

Economists at Morgan Stanley led by Diego Anzoategui stated in a report on July 5: "We believe the trend identified in the previous report was incorrect." "While we expect inflation to slow down as insurance company profits normalize, we have not seen a significant slowdown in companies filing for substantial premium increases."