US inflation is expected to fall sharply in June, to its lowest level in two years, but it is unlikely to sway the Federal Reserve from raising interest rates at its July meeting.
Economists expect the headline inflation figure to ease to 3.1% in June from 4.0% in May, on an annual basis. The core figure - which excludes food and energy - is expected to drop to 5.0% from 5.3%.
Prices are expected to increase 0.3% on a monthly basis in June, up from 0.1% the previous month, but the annual figure will be helped by so-called base effects, as extremely large rises from June 2022 drop out of the calculations.
While headline inflation has fallen steadily towards the Fed’s 2% target, core inflation has remained more stubborn prompting expectations of more interest rate rises.
The CME Fed Watch tool shows a 92.4% probability that interest rates will be increased at the Fed's July meeting.
The US central bank left rates unchanged at its June meeting but has signalled it expects at least two further rises before the end of the year.
Craig Erlam at Oanda reckons it “would take something remarkable from the inflation report today to convince policymakers that they can afford to pause again.”
Deutsche Bank agreed. “For markets, the big question will be what it means for the Fed, but our economists think it would take a very large inflation miss to call a July hike into question, particularly given the jobs numbers last week.”
“And for now at least, investors remain very confident that the Fed will proceed with a hike in two weeks’ time, with futures still pricing in a 89% chance of a move.”