June's recent inflation report came in below economists’ consensus forecasts for both headline and core, which sent stocks higher after the announcement. Investors were quite pleased with the report. Although we expect the Federal Reserve (Fed) to raise rates during this month’s Federal Open Market Committee (FOMC) meeting on July 25-26, further evidence of ebbing inflation pressure increases the chances that this month may mark the last hike of this Fed rate hiking cycle.
Rents Plummet While Shelter Costs See The Largest Increase
Inflation in 2023 has been significantly impacted by the housing sector. It is anticipated that housing costs, which account for a sizable portion of the CPI, will decline. The reason for this is that there has been an increase in development, particularly of multi-family homes, which should help lessen the pressure on rents. Although we are aware that lower rents will take some time to flow through to the official inflation measurements, the decline is favorable for inflation rates in the months to come. Investors and policymakers alike should prepare for a decrease in housing-related inflation in coming months.
Restaurants Order Up Rising Prices Amid Increasing Demand
Prices at restaurants are still rising at a fast clip, indicating that consumer demand is still strong for restaurant service. The overall theme in recent months has been a strong consumer demand for experiences over stuff and we are seeing that play out in consumer pricing dynamics in this and other industries.
What Does This Mean for the Next FOMC Meeting?
During last month’s Congressional testimony, Chairman Jerome Powell discussed concerns over core inflation or the “core services ex-shelter” basis. While inflation is improving, it is still above the Fed’s goal. Market participants believe that there is more than a 90% chance that the Fed will raise rates by 0.25% at its meeting later this month, according to CME’s FedWatch tool.
Recent CPI data does lower the probability of an additional hike later this year. Whether we get one more hike or two, the Fed could begin pulling back on its monetary policy levels as inflation comes down further and employment slows later this year and into early 2024. A shift in policy direction will likely please stock and bond markets.
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