US stocks remain near record highs as Powell fuels rate cut hopes

On Thursday, investors will digest one of the most important data points that will shape the Federal Reserve’s future interest rate policy: the June consumer price index (CPI).

The inflation report, due out at 8:30 a.m. ET, is expected to show headline inflation at 3.1%, slowing from May’s 3.3% increase. That would be the smallest annual increase since January, as a further decline in energy prices likely contributed to renewed downward pressure on the headline CPI.

Over the previous month, consumer prices are expected to have increased by 0.1%, up slightly from the flat monthly reading in May.

Meanwhile, on a “core” basis, which excludes more volatile food and gasoline costs, prices in June are expected to have risen 3.4% from a year ago and 0.2% from the previous month, unchanged from May, according to Bloomberg data.

“We expect the June CPI report to be another confidence booster after May’s undeniably strong report,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note last week.

Economists said that while the anticipated numbers are “not as low as May’s, it would be a good outcome for the Fed.”

Thursday’s inflation data comes at a critical time for the central bank after slowing labor market growth, coupled with recent testimony from Federal Reserve Chair Jay Powell, kept rate cut hopes alive.

Powell, who will conclude his semiannual policy update to Congress on Wednesday, has largely stuck to his data-driven rhetoric — a positive sign given the recent positive data. On Tuesday, he told the Senate Banking Committee that while there have been signs of weaker inflation, the Fed still needs more “good data” to be confident that inflation is moving closer to its 2% target.

Core inflation has remained stubbornly high due to rising costs for housing and basic services like insurance and health care. In May, non-housing services “surprisingly declined, largely due to a slight decline in auto insurance,” Bank of America’s Juneau and Gapen noted.

But economists expect the category (and auto insurance) to have increased in June, indicating a “bumpy” path to price stabilization.

“Non-housing services inflation is expected to moderate over time, given the slowdown in service sector wage inflation; however, a prolonged period of deflation is unlikely,” they warned.

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