U.S. inflation in June came in far softer than forecast, likely putting on hold what were fast-rising expectations for imminent Federal Reserve rate hikes.
The Consumer Price Index (CPI) declined 0.4% in June, compared to economist forecasts for a decline of 0.1% and May’s sharp rise of 0.5%. On a year-over-year basis, CPI was up 3.5% versus forecasts for 3.8% and 4.2% in May.
Core CPI, which excludes volatile food and energy categories, was flat in June, versus forecasts of 0.2% and May’s 0.2% increase. On a year-over-year basis, core CPI rose 2.6% against expectations for 2.8% and 2.9% in May.
Bitcoin sees a boost
The softer inflation numbers gave a lift to risk assets. Bitcoin extended its earlier gains following the release, rising to $63,400, up about 2% over the past 24 hours. The crypto market had been under pressure recently amid rising rate hike expectations.
Already a key data point, June’s CPI was of particular importance after Fed Governor Chris Waller yesterday implied he would be in favor of an immediate rate hike were core CPI not to come down in this morning’s report. Indeed, July rate hike probabilities had shot to as high as 42% from just 8% one month ago, according to CME FedWatch.
Markets shift expectations
Now, with inflation coming in much cooler than anticipated, traders are quickly reassessing their outlook. The chances of a rate hike at the Fed’s next meeting have dropped significantly. Some analysts think the central bank can afford to wait and see how the economy evolves before tightening further.
Investors will get to hear what Fed Chairman Kevin Warsh thinks about all of the above in roughly 90 minutes as he begins his testimony to Congress regarding the state of the economy. His remarks could provide more clarity on the path forward for monetary policy.
Core services remain sticky
While the headline numbers were encouraging, some parts of the inflation picture remain stubborn. Services inflation, particularly in categories like shelter and healthcare, stayed elevated. Core services excluding shelter rose 0.1% month over month, suggesting some underlying price pressures persist. The Fed is likely to keep a close watch on those trends before making any moves.
Overall, the June CPI report offers the Fed room to pause its tightening cycle, at least for now. The data may also help calm jittery financial markets that had priced in a more aggressive Fed.
