• For the second consecutive month, CPI prices rose 0.1% (month-on-month) in June, firmer than market expectations for no change. Headline inflation decelerated to 1.6% year-on-year (y/y) owing to a drop in energy prices.
  • Core prices rose 0.3% m/m, also a bit better than expected. The move ends a streak of four consecutive months of mediocre 0.1% monthly growth. As a result, 12-month change firmed to 2.1% in June from 2.0% in May.
  • The pickup in core inflation reflected a firming in core goods prices (+0.4% m/m), and core services inflation (+0.3% m/m).
  • The price of housing services rose 0.3% m/m in June, bouncing back from a weak 0.1% gain in May. This was the strongest contributor to the move higher in core inflation in the month. Apparel prices also posted a strong gain (+1.1% m/m). Medical care inflation remained solid (+0.3% m/m). Transportation prices fell 0.7% in the month, building on May’s 0.3% decline.

Key Implications

  • Headline inflation may have dipped lower in June due to energy prices, but the real story was in the firming in core goods and services. The move suggests that the Fed’s preferred core inflation measure, core PCE, may show signs of firming as well in June.
  • From the Fed’s perspective, the domestic economic data is holding up, with core PCE inflation looking to make progress toward its 2% target in early 2020. Still, as affirmed both in the FOMC minutes and Chair Powell’s testimony, the crosscurrents of weaker global growth and risks has spurred the Fed to take out insurance by cutting rates at its meeting the end of this month. Nevertheless, as long as the domestic data continues to hold up, the number of cuts will prove to be fewer than markets are anticipating.


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