New data showing inflation continues to cool in the United States will not be enough to dissuade the Federal Reserve from raising the interest rate again in July, but this increase could be the central bank’s last, analysts believe.
The headline consumer price index (CPI) rose 3% in the 12 months that ended in June—down from 4% in May, below the expected 3.1% gain and marking the smallest annual increase since March 2021. It rose 0.2% month-over-month, up from a 0.1% gain in May.
Core inflation, which removes the more volatile food and energy components, also softened more than expected during the month.
Core CPI came in at 4.8% for the 12 months that ended in June, below the expected 5%. It rose 0.2% month-over-month in June, the smallest one-month gain in that reading since August 2021.
Additional tightening 'questionable'
ING chief international economist James Knightley noted that, while this good news on US inflation would not prevent a July interest rate hike, the need for additional tightening thereafter was questionable.
“This is certainly not enough to prevent a July rate hike given the Fed's current position, but suggests less need for the second hike it is currently indicating,” he said.
“Moreover, with business surveys pointing to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI, the inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.”
Titan Asset Management chief investment officer John Leiper agreed. “This won’t dissuade the Fed from increasing rates at the next meeting, but it may bring forward the terminal rate discussion, pricing out a second-rate hike later this year,” he said.
Evelyn Partners chief investment strategist Daniel Casali added: “Regardless of whether the FOMC raises interest rates later this week or not (markets’ expectation is current for a 25bps increase), the Fed is likely coming to the end of its interest rate hiking cycle.”
Investors reacted positively to the CPI print, with the Nasdaq adding 1.4%, the S&P 1%, and the Dow Jones 0.8% on Wednesday morning.
Contact the author at emily.jarvie@proactiveinvestors.com
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