Another downside surprise in
U.S. June inflation

• In June, headline CPI growth in the U.S. edged down to 3% from 3.3% in May. That’s below consensus expectations and marked another downside surprise after May.
• Details generally looked at least as soft for price growth as the headline would suggest with the breadth of price growth across products narrowing and the Fed’s preferred core services ex-rent component (‘supercore’) declining for a second straight month.
• That closely watched supercore measure posted a second consecutive outright decline (-0.04% in May and -0.05% in June) to leave the three-month annualized basis down to 1.3% in June. That's the slowest reading since October 2021 and just half of the pre-pandemic run rate of 2.6%.
• The easing among core services components was also widespread, with transport and education services seeing monthly declines from May. In June, just under half of the CPI basket (excluding shelter) saw three-month annualized inflation reading above 2%, comparing to 60% three month ago.
• Energy CPI dropped lower to 1% in June upon a second monthly decline in gasoline prices. Food CPI was little changed at 2.2%, as slower reading for grocery CPI (1.1%) continued to balance off still elevated inflation for dining out (4.1%).
• The broader ‘core’ CPI excluding food and energy also dropped to 3.3% above last year after a smaller 0.1% monthly increase from May. That's in part thanks to a long-anticipated slowing in the home rent component. In June, rents grew by 0.2% from May, the slowest reading in almost three years.
• In the future, we continued to expect further moderations in rents CPI after a long lag behind slowing in market posted rents that gradually filter through to average rents as leases are renewed.
• Bottom line: A second U.S. CPI downside in a row in June has added to market odds for a first rate cut from the Federal Reserve this September. That’s also building on a weaker round of employment data last week that showed persistent unwinding in tight labour market conditions. From the Fed’s perspective, these are all data prints that they would like to see at this stage to confirm that interest rates are working to cool inflation pressures sustainably and to realize their dual mandate. Powell has always communicated the Fed’s decision making as a risk-management process, but also reiterated in his congressional testimony this week that there are downside risks to the economy and labour market from rates being restrictive for too long. After today's CPI report, we think an interest rate cut at the Fed’s next meeting in July is still unlikely but the odds are tilting towards a September cut.