June CPI Inflation Report Preview

Thursday’s widely expected inflation report could bolster expectations that the Federal Reserve will cut interest rates in coming months.

The Consumer Price Index (CPI) report for June is scheduled to be released at 8:30 a.m. ET. Recent economic releases, including last week’s report that the unemployment rate rose to 4.1% in June, suggest that both inflation and economic growth are slowing.

Thursday’s report came after Federal Reserve Chairman Jerome Powell testified before Congress this week for two days. The central bank chief did not say when interest rate cuts would begin. But Powell said the Fed believes the risks to the economy lie in a balance between inflation and recession, and that it doesn’t need to wait until inflation hits the 2% mark to cut interest rates.

Economists surveyed by Dow Jones expect the CPI to rise 0.1% from the previous month and 3.1% from a year ago. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% from May and 3.4% from June last year.

The CPI in May was unchanged from the previous month and up 3.3% from a year earlier.

Matt Brenner, vice president of investment and product management at Mission Square Retirement, said keeping an eye on unemployment and inflation trends could strengthen the case for a rate cut.

“Inflation remains high relative to the Fed’s policy level. [2%] “The objective has been achieved. At 4.1 percent, the unemployment rate remains very low by historical standards. However, the unemployment rate has begun to creep up and inflation continues to trend downwards,” Brenner said.

“The Fed has been level-focused for some time and now appears to be starting to lean more toward trend-focused, which makes a rate cut more likely,” Brenner added.

Price movements in the components of the Consumer Price Index (CPI) will also be a focus on Thursday, especially if the numbers differ from expectations. Housing and health care services could be key areas to watch, said Tony Ross, chief investment officer at Wilmington Trust.

Housing and health services are also important parts of the personal consumption expenditures index, the Fed’s preferred inflation measure, rather than the CPI.

“We’ve seen the health service [be] “It’s pretty moderate, which is important because health services make up a larger portion of the PCE and is the more significant of the two inflation measures,” Ross said.

The CPI report was released at a time when the market was on an upward trend.

Stocks and bonds both rose in July as traders grew more confident that interest rates would be cut this year. The S&P 500 rose above 5,600 for the first time on Wednesday.

Pricing of fed-funds futures indicates that traders expect the Fed to keep rates on hold when it meets later this month and then cut rates in September, according to the CME FedWatch tool. A month ago, there was a roughly even chance of pausing rate cuts again in September, according to the tool, which calculates implied probabilities using 30-day fed-funds futures.

With July’s forecast unchanged, Thursday’s CPI release is unlikely to move the market too much, Megan Swiver, interest rates strategist at Bank of America, said in a client note on Wednesday.

“Lower oil prices and near-term limits on price declines will likely limit the market reaction in either direction,” Swiver said.

But Wilmington Trust’s Ross said a weaker-than-expected inflation rate could send stocks higher as some investors remain concerned from a brief spike in inflation earlier this year.

“I don’t think the market has fully appreciated the weakness of the economy and the fact that inflation is clearly a thing of the past,” Ross said.

—CNBC’s Michael Bloom contributed reporting.