CPI Preview: Even With Headline Inflation at 3.1%, Core CPI Could Remain The Fed’s Biggest Problem

Headline Consumer price inflation in the United States is predicted to have slowed significantly in June, but core inflation is expected to have remained steady.


According to economists polled by Bloomberg, the Bureau of Labor Statistics will release its latest US consumer price index report on Wednesday, which is likely to indicate that headline inflation was 3.1% year on year in June. That would be a considerable improvement from May's number of 4% and its lowest rate since March 2021.


However, core CPI, which excludes volatile food and energy sectors, is predicted to be 5% year on year, barely below the previous month's figure of 5.3%. Core inflation has remained stubbornly high, despite a drop in headline inflation, and will likely play a more crucial role when the Fed meets in late July.




Figure 1: CPI and Core CPI data, 2019-2023, Source: Bureau of Labor Statistics



Inflation in the United States is likely to have slowed further in June, but a key gauge of underlying price pressures remains elevated, keeping the Federal Reserve on track to resume interest-rate hikes this month.


Even if the headline index ticked lower to its slowest annual pace in more than two years, PCE minus food and energy climbed to an annual 4.6% in the same period. This suggests that underlying inflation remains sticky.


In June, the Fed held interest rates constant after rising them for ten consecutive meetings to a range of 5% - 5.25%. According to predictions provided following their June meeting, most officials anticipate raising rates by another half percentage point before the end of the year.


Three Federal Reserve officials on Monday said policymakers will need to raise interest rates further this year to bring inflation back to the central bank’s goal.


According to July 7 data from the Bureau of Labour Statistics, employment growth slowed last month, although wage rises remained strong. According to Loretta Mester of the Federal Reserve Bank of Cleveland, wage growth is still "well above the level consistent with 2% inflation given current estimates of trend productivity growth."


US non-farm payrolls increased to 209,000 last month — less than economists expected — and job gains over the prior two months were revised lower. The unemployment rate fell to 3.6%, while average hourly earnings rose 4.4% from a year earlier.


According to a Federal Reserve Bank of New York survey, US consumers' short-term inflation expectations fell for the third straight month in June to the lowest level in more than two years.


This will be the last significant fresh data before the Federal Open Market Committee’s next meeting. It is largely expected to announce another rate hike on July 26, with both recent "Fedspeak" and minutes from the previous FOMC leaning in that direction. Despite the Fed's unanimous decision to keep policy steady last month after ten consecutive hikes, the minutes revealed that policymakers were increasingly at odds with one another.



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