US June CPI cools more than expected, will the Fed stabilize the rate cut in September?

According to the Zhitong Finance and Economics APP, inflation in the United States cooled in June, further supporting the Fed's rate cut. Data released by the U.S. Bureau of Labor Statistics on Thursday showed that the core Consumer Price Index (CPI) excluding food and energy costs rose by 0.1% month-on-month in June, the smallest increase since August 2021, below the market expectation of 0.2%. The index rose by 3.3% year-on-year, also the lowest increase in over three years, below the market expectation of 3.4%.

Due to the decline in gasoline prices, the overall CPI in the United States fell by 0.1% month-on-month in June, the first decline since the outbreak of the pandemic. The overall CPI rose by 3% year-on-year. Economists believe that the core CPI is a better reflection of underlying inflation compared to the overall CPI.

These data further prove that inflation in the United States has resumed its downward trend after rebounding earlier this year, while broader economic activity seems to be slowing down. Reports released last week showed that the unemployment rate has risen for the third consecutive month, supporting the Fed's rate cut later this year.

Fed Chairman Jerome Powell avoided hinting at the timing of a possible rate cut when testifying before Congress this week, insisting that policy measures will be guided by the upcoming data. Following the CPI report, traders continue to believe that the Fed is most likely to cut rates in September. Fed officials will convene a meeting later this month.

Housing Inflation

The largest category in the service sector, housing prices, rose by 0.2%, the smallest increase since August 2021. Owner's equivalent rent increased by 0.3%, also the lowest increase in three years.

According to Bloomberg's calculations, service prices excluding housing and energy have fallen for the second consecutive month. Fed officials emphasize the importance of considering this indicator when assessing the inflation trajectory.

However, the Fed's most closely watched inflation gauge, the Personal Consumption Expenditures (PCE) index, does not emphasize housing costs like the CPI. This helps explain why the PCE is trending closer to the Fed's 2% target.

The latest performance of Delta Air Lines (DAL.US) suggests that there is still room for cooling in some service inflation. Due to intense competition in the domestic U.S. market leading to lower airfares, the airline's third-quarter performance guidance fell short of expectations.

Delta Air Lines CEO Ed Bastian stated, "Oversupply is leading to significant discounts. Every company is affected."

Rate Cut in September Stabilized?

The cooling of inflation has strengthened market expectations for a rate cut by the Fed in September.

Seema Shah, Chief Global Strategist at Principal Global Investors, stated that this inflation data firmly puts the Fed on the path to a rate cut in September "However, a rate cut in July is still unlikely," she said. "The Federal Reserve still needs to gather more evidence to prove that price pressures are weakening before determining the inflation path."

Led by Ellen Zentner, Morgan Stanley's US economists have updated their forecast for June PCE. They stated that CPI data implies a 0.205% increase in core PCE, which is actually faster than the 0.08% monthly increase in May. This will still bring core PCE to its second-lowest level of the year, providing convincing evidence for the Fed to start cutting rates as soon as possible.

Morgan Stanley continues to believe that the Fed will cut rates for the first time in September, followed by "at every meeting before mid-2025."

Ira Jersey, the US rate strategist at Bloomberg Intelligence, also said: "These data make the market more convinced that not only is the Fed likely to cut rates in September, but once they do, the Fed will cut rates more frequently."