The US inflation rate, after months of consecutive increases, is widely anticipated to show a decline in tonight's data. However, the key question remains: does this mark a definitive peak in the inflationary rebound, or is it merely a temporary respite driven by falling gasoline prices ahead of the breakdown of a US-Iran ceasefire arrangement?
Following a rise to a three-year high in May, US inflation is likely to experience a significant cooling in June. Yet, this cooling is largely attributable to declining fuel costs and does not necessarily signal the end of the inflationary uptrend. Factors such as housing, auto insurance, travel services, and the pass-through of tariffs into goods prices will continue to determine whether US inflation can genuinely return to a downward trajectory.
The US Bureau of Labor Statistics is scheduled to release the June Consumer Price Index (CPI) data at 8:30 PM Beijing time on Tuesday. Market expectations suggest the headline CPI may show a month-over-month decline of 0.1% to 0.2%. If realized, this would be the first negative monthly reading since May 2020. The year-over-year rate is expected to drop from 4.2% in May to around 3.8%. The core CPI, which excludes food and energy, is forecast to rise 0.2% month-over-month, with its annual rate decreasing from 2.9% to approximately 2.8%.
A point of caution is that bond traders have increased their bets on a Federal Reserve interest rate hike in July, ahead of the inflation data release and Fed Chair Waller's testimony before Congress.
This trend of rising rate expectations is evident in both the interest rate options market and the US Treasury market. The implied probability of a 25-basis-point rate hike later this month in the options market has climbed from below 10% to around 50%. The yield on the two-year US Treasury note, which is more sensitive to Fed policy changes than longer-term bonds, remained above 4.25% on Tuesday, with its spread over the policy rate continuing to widen.
Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, stated, "A July rate hike by the Fed is a strong possibility. We would need some luck for the numbers to come back down to 2%."
Following comments from Fed Governor Waller that policymakers should consider raising rates "sooner rather than later" if core inflation data shows "another uptick," market pricing for a July move accelerated.
Gasoline Prices Drive Headline CPI Cooling
Regarding the June CPI figures, Wall Street is almost certain: the cooling in inflation will be primarily driven by energy prices.
In June, with a temporary US-Iran ceasefire arrangement easing crude supply concerns, the average monthly retail gasoline price in the US fell by approximately 9% compared to May. Although energy carries a limited weight in the CPI basket, its price volatility is significant enough to pull the headline monthly CPI into negative territory.
Goldman Sachs forecasts a 0.11% month-over-month decline in headline CPI for June. Morgan Stanley's projection is lower, at a 0.19% drop. Danske Bank offers a more cautious view, expecting headline CPI to still rise by 0.16% month-over-month, reflecting that food and other components may partially offset the drag from energy.
However, this cooling may not be sustainable. The US-Iran ceasefire has recently broken down, oil prices are rising again, and previously high energy costs may also be transmitted with a lag to transportation, distribution, airfare, and goods prices. Therefore, the "inflation dividend" from energy in June appears more like a temporary buffer rather than evidence of a trend reversal.
Core CPI Reveals the True Inflation Picture
For Wall Street institutions, the core CPI, which excludes food and energy, is of greater significance. The US core inflation rate has risen from 2.5% at the start of the year to 2.9% in May, indicating that price pressures had begun to broaden even before the escalation of Middle East conflicts.
Forecasts from the three major banks for June's core CPI are relatively close. Goldman Sachs expects a 0.17% monthly increase and a year-over-year rate falling to 2.76%. Morgan Stanley projects a 0.22% monthly rise and an annual rate around 2.8%. Danske Bank anticipates a 0.23% monthly gain and an annual rate of approximately 2.83%.
This suggests that unrounded core CPI forecasts are clustered around 0.2%, significantly below May's headline inflation performance but insufficient to prove inflation has cooled decisively. Since the final monthly rate is rounded to one decimal place, the actual underlying reading and the composition of various components may be more important than the surface number.
There are four main clues to watch in this core CPI release. First is housing inflation. Housing holds the largest weight in the CPI and has been the most consistent downward force for core inflation in recent years. Goldman Sachs expects owners' equivalent rent to rise 0.23% and primary rent to increase 0.17% in June, continuing a moderate cooling trend. If the housing component continues to slow, it could create conditions for core CPI to stabilize around 0.2% in the coming months. However, Morgan Stanley still lists housing as a primary upside risk, indicating uncertainty about the pace of its decline.
Second are auto-related prices. Goldman Sachs expects used car and new car prices to decline by 0.5% and 0.1% respectively, with auto insurance prices possibly dipping 0.1%. Danske Bank holds the opposite view: recent weak retail used car prices relative to lagging wholesale prices could lead to a catch-up increase; auto insurance prices also carry a strong rebound risk after posting their largest monthly drop since 2020 in May. Whether auto insurance prices rebound is a key variable for core services inflation this period.
Third is the temporary disruption from the World Cup on travel services. Event-related traffic could push up prices for hotels, airfare, dining, and entertainment. Goldman Sachs expects airfares to rise 1.5% and hotel prices to increase 0.3%, but notes the travel price impulse from the earlier energy shock is fading. Morgan Stanley also expects airfare and hotel price increases to decelerate from May, though both remain key upside risks in their forecast. The World Cup's impact on prices is expected to be short-lived but could push June's core services data above trend levels.
Finally, there is core goods and tariff pass-through. Goldman Sachs believes categories like new vehicles and communications still face downward pressure from residual seasonal factors. Danske Bank expects core goods prices to be roughly flat, but medical care goods may rebound after prior unusual weakness. Morgan Stanley assumes some tariff costs have yet to be fully passed through to consumers. If core goods remain in negative growth territory, it suggests tariff impacts are waning; if goods prices re-accelerate, it indicates inflation pressure may be spreading further from services.
Inflation Alarm Not Yet Silenced
In summary, the June CPI is most likely to present a combination of "headline cooling, core stickiness": gasoline prices driving a rare decline in headline CPI, housing inflation continuing its slow retreat, but with rebound risks persisting for auto insurance, hotels, airfare, and some goods prices.
More importantly, US services inflation is still running above 3%. Service prices are primarily driven by wages and operating costs and are typically less prone to reversal than goods and energy prices. Previously elevated energy costs, tariffs, and supply chain disruptions may also continue to feed into final prices in the coming months.
Therefore, even if the headline CPI shows a negative monthly reading, it cannot be simply interpreted as the removal of inflation pressure. Furthermore, the Federal Reserve's 2% inflation target is based on the Personal Consumption Expenditures (PCE) Price Index, not the CPI. The Producer Price Index (PPI) data released on Wednesday will provide additional details for key components of core PCE, such as financial services and investment management. This week's data is more likely to answer a phase-specific question: has the US inflation rebound peaked, rather than whether the inflation problem is over.
For Fed Chair Waller, the most favorable outcome would be core CPI stabilizing around 0.2%, accompanied by cooling in both housing and non-housing services. If the core monthly rate approaches 0.3% again, coupled with broad-based increases in auto insurance, travel services, and goods prices, then June's headline CPI decline would likely be just a temporary illusion created by energy prices.
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