After the latest Consumer Price Index (CPI) report, the 12-month inflation rate was 3 percent, the lowest level in over three years.
First Monthly Decrease in Four Years
The monthly rate decreased by 0.1 percent, the first monthly decrease in four years.
Potential Federal Reserve Response
This positive, modest shift might be enough to cause the Federal Reserve to cut interest rates in 2024.
Core CPI Increase
Excluding food and energy costs, the core CPI increased by 0.1 percent in May and 3.3 percent in the previous year. While the core CPI did increase, it was the smallest increase since April 2021.
Impact on Gasoline Prices
Gasoline prices decreased by 3.8 percent from May to June, which helped modestly compensate for increases in food and shelter.
Used Vehicle Costs as Indicator
Another often-used indicator is used vehicle costs, which decreased 1.5 percent and are down just over 10 percent from last year. Used cars comprised a large portion of the inflationary surge in 2021, as COVID-19 had impacted the car pipeline.
Federal Reserve’s Inflation Target
The Federal Reserve has reiterated that its inflation target is two percent. Currently, the economy is sitting at three percent, but the latest CPI report shows a trend in the right direction.
Historical Context and Interest Rates
The highest CPI report occurred in June 2022, when the index reached 9 percent. This led to several sequential interest rate hikes that ended last year in July 2023. Since then, interest rates have remained relatively stable at between 5.25 and 5.5 percent.
Market Expectations
With inflation down considerably since its 9 percent high, many are waiting for the Federal Reserve to resume its lower interest rate policy.
Traders Price In Rate Cut in 2024
Many traders and bankers expect the central bank to lower rates in September or later.
Expert Opinions
Seema Shah of Principal Asset Management said, “The latest inflation numbers put us firmly on the path for a September Fed rate cut. The smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1’s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year.”
Double or Triple Rate Cut Possible
Many see a likely double rate cut or more for the remainder of 2024, one in September and one or two later in the year.
Jobless Claims Report
In addition to a positive CPI report, the Department of Labor reported that weekly jobless claims came in at 222,000, which is 17,000 less than the previous week and the lowest jobless claims rate since June 1.
