July 12, 2024
New Delhi, India
June CPI: Signs Point to September Rate Cut
Key Highlights:
- CPI Report Encouragement: The latest Consumer Price Index (CPI) report is the most positive the Federal Open Market Committee (FOMC) has seen since starting its inflation control measures over two and a half years ago.
- Overall Price Decline: Consumer prices fell by 0.1%, mainly due to lower energy prices and a modest rise in food prices.
- Core CPI: Excluding food and energy, the core CPI increased by just 0.1% (0.06% unrounded), marking the smallest rise since January 2021. The slowdown was broad-based, with declines in core goods prices and only a 0.1% increase in core services inflation compared to the previous six-month average of 0.4%.
Key Contributors to CPI Changes:
- Shelter Inflation: A significant reduction in shelter inflation contributed to the lower CPI.
- Discretionary Spending: Decreases in discretionary spending categories such as airfares (-5%), lodging away from home (-2%), and recreation services (-0.1%) also played a role.
Economic Data Support for Rate Cut:
- Three-Month Core CPI Trend: Over the past three months, core CPI has increased at a 2.1% annualized pace, the smallest three-month change in core prices since March 2021.
- Labor Market Indicators: Signs of cooling in the labor market include a deceleration in employment growth and a rise in the unemployment rate.
Currency Market Update July 12, 2024: USDINR, EURINR, GBPINR, JPYINR
FOMC Outlook:
- Chair Powell’s Comments: Fed Chair Jerome Powell acknowledged these cooling trends, indicating that “elevated inflation is not the only risk we face.”
- Rate Cut Predictions: While a rate cut at the July 31 FOMC meeting is unlikely, it is anticipated that the FOMC will reduce the federal funds rate by 25 basis points (bps) at its September meeting, with an additional 25 bps cut expected in December.
Conclusion:
The June CPI report presents a strong case for an upcoming rate cut, with significant cooling in inflation and supportive economic data. This has bolstered expectations for a reduction in the federal funds rate in the coming months.
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