US June employment and CPI will boost case for rate cut

Each month, we forecast the dozens of price categories that underlie the consumer price index, and our forecast is for the headline and core CPI to rise by 0.1% and 0.2% in June, respectively. This would be another benign inflation print from the Federal Reserve’s perspective and reinforces our baseline forecast for a September rate cut. Weaker inflation won’t be alone in factoring into the Fed’s calculus as the downside risks to the labor market continue to mount.

What you will learn:

• Falling motor fuel prices and a relatively tame increase in food prices will hold back the gain in the headline CPI, though rising natural gas prices create some upside risk via utility gas service. Within the core CPI, vehicle prices are set to decline, but transportation services remain upside risks.
• Most important, we think that the reversal of some odd dynamics in the regional data on shelter price should lead to a step-down in the sequential pace of growth in owners’ equivalent rent, which accounts for an important chunk of the core CPI.
• Besides an expected favorable CPI reading, a rising unemployment rate bears close watching from a risk management perspective as history has repeatedly shown that joblessness does not proceed in a linear, orderly fashion.