Next week’s June Consumer Price Index (CPI) report will strengthen the Federal Reserve's confidence in disinflation, potentially prompting an earlier-than-expected rate cut, according to analysts at Bank of America.
In a recent note, Bank of America analysts have suggested the data will further bolster the Federal Reserve's confidence in ongoing disinflation.
Following May's promising CPI data, the bank predicts a modest 0.1% month-over-month increase in headline CPI for June, driven partly by a continued decline in energy prices. This would result in a year-over-year rate decrease to 3.2%.
The note highlights that while core CPI is expected to rise by 0.2% month-over-month, slightly higher than May's figure, it remains a positive outcome for the Fed.
Analysts point to non-housing services, particularly motor vehicle insurance, as key contributors to this slight acceleration. They do not foresee a sustained period of deflation in non-housing services despite anticipated moderation due to cooling wage inflation in the services sector.
"Non-housing services inflation should moderate over time given cooling services wage inflation; however, a sustained period of deflation is unlikely," analysts wrote.
Core goods prices are forecasted to decline for the fourth consecutive month due to falling new vehicle prices and rising inventories. However, analysts cautioned about potential upside risks from increased shipping costs, which might be challenging to pass on to consumers amid cooling demand.
“Should the CPI report print in line with our expectations, we would maintain our expectation for the Fed to start its cutting cycle in December,” analysts wrote.
The bank did say that another 0.2% month-over-month increase in core CPI could prompt an earlier cut.