Inflation Dipped In June. So What’s Next?

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Deflation Is Here

For the first time in more than four years, inflation measured by the Consumer Price Index (CPI) declined from one month to another. So is America in its deflation era now? Maybe, but let’s not get ahead of ourselves.

Deflation is essentially the opposite of inflation, meaning prices are falling rather than increasing. That’s different from disinflation, the slowing pace of price increases we have already been experiencing.

For Americans, this is welcome news given the increased cost of living, even if we’re only talking about one data point here. So what’s going to happen next?

Cooling Costs

Prices inched down 0.1% between May and June, with the annual inflation rate still at 3%. Even though that’s the lowest level in about a year, it’s still well above the Federal Reserve’s inflation target of 2%. A drop in gasoline prices offset increases in food and housing costs. The high cost of housing has been one of the reasons inflation has proven so sticky. Fed officials predict that a deceleration of prices will take longer to show up in housing prices. Essentially, renters don’t resign their leases on a monthly basis, so pricing changes trickle through the market slowly.

Core inflation, which excludes volatile categories like food and energy, rose just 0.1% from May and 3.3% annually, still putting it at the lowest level since April 2021.

Rate Reversal

If the inflation threat is diminishing, does this mean the Fed’s high interest rate policy has done its job and it’s time to cut rates? If you ask the market, the odds for a rate cut are on the up.

Following the release of the June CPI data, U.S. Treasury yields, which are a way investors can express future interest rate expectations, tumbled and expectations for a rate cut in September rose to roughly 85%, according to CME’s FedWatch Tool.

Federal Reserve Chair Jerome Powell spoke on Capitol Hill this week, where his comments further fueled market optimism. In his testimony, Powell said the economy was no longer overheated, and more positive inflation data would lay the groundwork for interest rate cuts. That positive data may have just arrived. Even so, one data point doesn’t make a trend, and investors and economists will be watching closely for the data due until the September Fed meeting.

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