Slowing US inflation in data due Wednesday will mark a potential turning point for policymakers in the coming months, according to Bloomberg Economics, as the Federal Reserve pushes to bring price increases back to its 2% goal.
(Bloomberg) — Slowing US inflation in data due Wednesday will mark a potential turning point for policymakers in the coming months, according to Bloomberg Economics, as the Federal Reserve pushes to bring price increases back to its 2% goal.
Both headline inflation and core prices, which exclude food and energy, are set to post a 0.2% increase in June from the previous month, according to Bloomberg economists. That would represent the smallest rise in core prices since 2021. Year over year, headline inflation is set to moderate to 3%, and core inflation to 4.9%.
“Optics and narratives matter, and the weak CPI readings we anticipate for June could prove pivotal in shaping inflation expectations in coming months,” Bloomberg economists Anna Wong and Jonathan Church wrote Tuesday in a preview of the numbers.
“Even the monthly pace of core CPI – free of base effects – will be the slowest since 2021,” they said.
Read More: US PREVIEW: Headline CPI to Fall to 3%, Core Lowest Since 2021
While inflation is softening, the increases in core inflation are still running at a pace that keeps the Federal Reserve tilted toward resuming interest-rate hikes this month. An expected 5% year-on-year increase in core inflation would still be more than double the Fed’s goal for the overall pace of price increases.
The June inflation readout follows a number of recent reports that underscore a resilient economy, despite 5 percentage points worth of interest-rate hikes over the past year. A jobs report Friday showed a healthy, albeit smaller-than-expected, increase in payrolls, as well as firmer wage growth.
Here’s what Bloomberg Economics is expecting:
- Both the headline and core (excluding food and energy) indexes are set to post a 0.2% advance in June, marking the smallest rise in core prices since 2021. Year-over-year, headline inflation is set to moderate to 3%, and core inflation to 4.9%
- Prices of used cars and trucks are set to drop 1.4%, helping to bring overall core goods prices down by 0.2% — marking a reversal from the increases of the past three months
- Owners’ equivalent rent is set to advance 0.5%, while the monthly increase in primary rent will moderate to 0.4%
Three Federal Reserve officials said on Monday said that policymakers would need to raise interest rates further this year.
“We’ve made a lot of progress in monetary policy, the work that we need to do, over the last year,” Federal Reserve Vice Chair for Supervision Michael Barr told a Bipartisan Policy Center meeting. “I would say we’re close, but we still have a bit of work to do.”
The Fed held interest rates steady in June after raising them for 10 straight meetings to a range of 5% to 5.25%. Most policymakers expect to increase rates by a further half percentage point by the end of the year, according to projections released after their June gathering.
The FOMC next meets July 25-26 and is widely expected to resume rate increases then.
“We’re likely to need a couple more rate hikes over the course of this year to really bring inflation back into a path that’s along a sustainable 2% path,” San Francisco Fed President Mary Daly said at the Brookings Institution in Washington.
Daly said the risks of doing too little to curb inflation still outweighed the risks of doing too much, though the gap between those two was narrowing. The San Francisco Fed chief said she was starting to see signs of the economy slowing, and added that supply and demand were coming into better balance.
“Inflation is our No. 1 problem,” Daly said.
The Bloomberg Economics estimates for Wednesday’s report are mostly below median projections in a Bloomberg survey of outside forecasters.
The Bureau of Labor Statistics said Friday that growth slowed last month, though pay gains remained robust. Cleveland Fed chief Loretta Mester said the current rate of wage growth was still “well above the level consistent with 2% inflation given current estimates of trend productivity growth.”
Wong and Church, the Bloomberg economists, said “soft inflation data could sow doubt about the need to hike again.”
“Bloomberg Economics expects the Fed to go on an extended pause” after the July meeting, they said.
–With assistance from Brendan Scott.
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