Inflation Cools Again, Bolstering Case For September Rate Cut

A key measure of underlying inflation had its mildest increase last month in more than three years, igniting hopes for interest rate cuts this quarter. 

The consumer price index rose 3% year-over-year in June, down from 3.3% in May.

Core prices — excluding volatile items like food and energy— rose just 0.1% from May to June, the smallest increase since January 2021, The Wall Street Journal reported, well before the Federal Reserve began raising interest rates to combat inflation. Core inflation was 3.3% year-over-year, which is also the lowest since 2021.

This new data boldens the Federal Reserve’s opportunity to cut interest rates in September, the WSJ reported. 

Investors don’t expect the Fed to lower interest rates at its next meeting at the end of July because officials haven't yet rallied support for that move, the WSJ reported. But the meeting should provide clarity on whether the Fed will lay the groundwork for a cut in September — and Wall Street traders on Thursday boosted bets for a cut in that month. 

The Fed began hiking interest rates in March 2022, then raised them 10 more times through last summer. It has left them flat since, waiting for inflation to hit its 2% target.

The uncertainty has rattled the commercial real estate industry, which began the year hopeful that three forecast rate cuts starting in June would boost deal volume. After a string of higher-than-expected inflation data in the first quarter — the CPI was up 3.5% year-over-year in March — economists pushed back their interest rate cut projections, and experts told Bisnow in April that CRE would feel more stress as a result. 

But inflation has steadily cooled since, coming in at 3.4% in April, 3.3% in May and now 3% in June.

“We’ve definitely seen a pretty sharp slowing,” Kevin Cummins, chief U.S. economist at NatWest Markets, told the WSJ. “This is certainly a confidence booster for the Fed.” 

The core personal consumption expenditures index, the Federal Reserve’s preferred gauge for inflation, also showed promising signs at the end of last month. The index increased 2.6% in May from a year earlier, its smallest increase in six months and down from its 7.1% peak in 2022.

“The economy is moving in the right direction, with persistent growth, moderating inflation, and a more normal balance in the job market,” Bill Adams, chief economist at Comerica Bank, told Bloomberg in a statement last month. “This is the kind of good data that will persuade the Fed that inflation is heading back to normal.”

June’s CPI report also shows a slowing in shelter inflation, coming in 0.2% higher than in May. This could help counteract the high rent growth data that has been cited as a sticking point in the Fed’s plan to reduce inflation.

The index for rent rose 0.3% month-over-month, the smallest increase since August 2021, according to the Bureau of Labor Statistics. 

There is a lag between active asking rents and CPI data, so the return of rent growth doesn’t necessarily alter the Fed’s decisions. But some analysts say this month’s shelter inflation data will have a significant impact. 

Shelter and auto insurance have been the primary lagging data points in the CPI, according to a Fundstrat report that CNBC reporter Carl Quintanilla posted on the social media platform X. Now that they are both cooling and all other components are below pandemic trends, Fundstrat expects inflation will “fall like a rock.”