CPI Falls 0.1% in June, Fueling Rate Cut Speculations

CPI Falls 0.1% in June, Fueling Rate Cut Speculations 

Heading into today's CPI release, expectations were high for more signs of a return to disinflation. These expectations were exceeded as headline consumer prices fell 0.1% month-over-month in June, contrasting with the forecasted 0.1% increase, marking the largest month-over-month decline since May 2020 and bringing the headline year-over-year CPI down to 3.0%.

This is the third consecutive lower-than-expected CPI report, leading to discussions about potential rate cuts in July, although the likelihood of such cuts remains low for now

The all-items index rose by 3.0% over the 12 months ending in June, down from the 3.3% increase for the 12 months ending in May. The energy index increased by 1.0% over the past year, while the food index rose by 2.2%. Gasoline prices fell by 3.8% in June, following a 3.6% decline in May, more than offsetting increases in shelter costs. The energy index fell by 2.0% in June, mirroring the previous month's decline. Food prices increased by 0.2% in June, with the food away from home index rising by 0.4% and the food at home index increasing by 0.1%.

A significant drop in energy costs and core goods prices largely drove the June data. Both goods and services inflation declined on a year-over-year basis, with goods deflation reaching its highest level since February 2004. Core CPI also came in lower than expected, rising only 0.1% month-over-month (versus the expected 0.2%), bringing the year-over-year core CPI down to 3.27%, the lowest since April 2021

The core index, excluding food and energy, rose by 0.1% in June, the smallest increase since August 2021. Increases were seen in shelter, motor vehicle insurance, household furnishings and operations, medical care, and personal care. The shelter index increased by 0.2% in June, while rent and owners' equivalent rent both rose by 0.3%. The medical care index rose by 0.2%, following a 0.5% increase in May. The motor vehicle insurance index increased by 0.9%, while the household furnishings and operations index rose by 0.5%. Airline fares fell by 5.0%, and used cars and trucks prices decreased by 1.5%.

Shelter inflation was 5.16% year-over-year in June, down from 5.41% in May. Rent inflation was 5.07% year-over-year, down from 5.30% in May. While core consumer prices have not seen a single monthly decline since the introduction of Bidenomics, they have increased by nearly 18% since then, averaging 4.9% per annum—significantly higher than the 2.0% per annum experienced under Trump.

Despite recent economic trends, core consumer prices remain at historic highs. SuperCore CPI rose on a month-over-month basis but fell below 5.0% on a year-over-year basis, still remaining elevated. Removing auto insurance would halve SuperCore CPI, yet it's an unavoidable expense.

The recent deflationary CPI data has boosted rate cut expectations, although July rate cuts are still not highly anticipated. Treasury yields dropped sharply, initially boosting stock prices, though major indices eventually stabilized. Gold prices soared above $2400. The Dollar Index fell, with USDJPY experiencing a significant drop amid speculation of possible Bank of Japan intervention. Crude prices remained relatively unchanged, and Bitcoin briefly rallied above $59,000. Equity market reactions showed limited enthusiasm, with notable movements primarily in small-cap stocks.

Despite expectations of rate cuts, history suggests that such cuts often precede market downturns rather than immediate gains. Rate cuts typically follow the economic impacts of previous rate hikes, which can take 18 to 24 months to materialize. This lag means that while rate cuts might be seen as positive in the short term, they often signal underlying economic weaknesses that could lead to market declines before recovery.

The broader economic context remains uncertain, with factors such as potential geopolitical conflicts, the U.S. fiscal situation, and the upcoming 2024 election adding to the uncertainty. Thus, while the market hopes for rate cuts as a savior, caution is warranted as the underlying economic challenges persist