Soft inflation sets Fed for September

June’s inflation report was soft again. Last month consumer prices fell for the first time in two years and excluding food and energy rose only 0.06% the weakest monthly increase since January 2021. Thus, headline inflation fell to 3.0% and core to 3.3% as the chart shows.

Source: Bank of Singapore, Bloomberg

June’s data is the third month in a row that consumer price index (CPI) rises have been benign. In contrast, increases in 1Q24 were worryingly high, near 0.4% each month for core prices, making the Federal Reserve delay the start of reducing interest rates from their current levels of 5.25-5.50%.

Encouragingly, core goods prices fell again in June by 0.1% and core services only rose 0.1%. As the next chart shows, goods inflation has fallen below zero as supply chains have eased after the pandemic.

Source: Bank of Singapore, Bloomberg

Moreover, services inflation and rents have begun to fall too after being stubbornly high since the US reopened in 2021.  

Source: Bank of Singapore, Bloomberg

The chart above shows core services costs are still increasing by 5.0% a year but June was the first time in three years when rents for tenants and owners’ equivalent costs rose by less than 0.3% a month. Since rent increases tend to be sticky, the step down in June is likely to continue, adding to the Fed’s confidence inflation will keep falling now back to its 2% target. In addition, the costs of core services ex-rents fell for the second month too by 0.05%.

We thus expect June’s data will let the Fed to start cutting interest rates twice this year in September and December to the benefit of risk assets.

This article was first published by Bank of Singapore on 12 July, 2024. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.