The US June CPI data will be released on Thursday at 20:30 Beijing time. The market widely predicts that due to the drop in energy and used car prices, the overall US CPI inflation in June will continue to decline.

US CPI inflation has fallen sharply from its peak of 9.1% in 2022. However, the Federal Reserve has stated that they need more confidence in the sustainability of inflation before starting to cut interest rates, and the latest report is expected to further enhance the Fed's confidence after good news in the May CPI report. Senior economist José Torres from Interactive Brokers is optimistic and says, "June will bring good news."

According to FactSet's consensus forecast, economists predict that the overall CPI in the US in June will rise 0.1% on a month-on-month basis and fall from 3.3% to 3.1% on a year-on-year basis. After excluding volatile food and energy prices, core inflation is expected to continue to rise slightly. FactSet data shows that analysts expect core CPI to increase 0.2% on a MoM basis in June and 3.4% on a YoY basis. Bank of America analysts wrote last week, "While this number is not as low as May’s, it will still be a good result for the Fed."

"Although not as low as May's, this will be a good result for the Fed," according to Bank of America analysts.

Analysts point out that the wide gap between core CPI inflation and overall inflation in May was due to a 2.0% decline in energy prices that month. By comparison, the drop in energy prices in June is limited, so it is unlikely that we will see a large gap again.

How will key components perform?

Regarding overall CPI inflation, trends in food prices are worth noting. Several major retailers and fast food chains announced significant price cuts at the end of May. Prices for food purchased in stores have remained stable for the past four months and have actually fallen 0.2% since January, but profit margins are still higher than pre-pandemic levels, so there is room for further price cuts. In addition, the rate of increase in restaurant food prices may slow down. Last year, food prices rose 4.0% YoY, far outpacing grocery prices, while prices for food purchased in stores increased only 1.0%. In May, restaurant prices rose 0.4%, and the increase in June is expected to be significantly lower.

However, Torres predicts that food, healthcare, and transportation costs in the US will rise in June. Analysts also expect auto insurance prices to continue to rise. At the same time, Torres believes that the decline in energy costs (including gasoline and aviation fuels) and energy service prices (including electrical utilities) will provide some relief for inflation. He also expects prices for new cars, used cars, and outfits to decrease. Bank of America analysts expect overall core commodity prices to continue to fall, partly due to a drop in new car prices. They wrote that the increase in new car inventory is causing manufacturers to offer more discounts and customer incentives. They also added that if transportation costs rise in the coming months, core commodity prices may rise again.

Housing, including rental prices and owner-equivalent rent, has been one of the main drivers of overall inflation. Economists predict that there will be some degree of slowdown in June. Goldman Sachs analysts said, "We expect housing inflation to decline from the previous month. Rent inflation will fall to 0.36%, and owner-equivalent rent inflation will drop to 0.39%. The gap between new and existing tenants' rent will continue to narrow." Bank of America analysts said that the cooling of rent and owner-equivalent rent inflation in the coming months "should increase the Fed's confidence in the outlook for inflation."

Bank of America analysts expect overall core commodity prices to continue to fall, partly due to a drop in new car prices. They wrote that the increase in new car inventory is causing manufacturers to offer more discounts and customer incentives. They also added that if transportation costs rise in the coming months, core commodity prices may rise again.

Housing, including rental prices and owner-equivalent rent, has been one of the main drivers of overall inflation. Economists predict that there will be some degree of slowdown in June.

Goldman Sachs analysts said, "We expect housing inflation to decline from the previous month. Rent inflation will fall to 0.36%, and owner-equivalent rent inflation will drop to 0.39%. The gap between new and existing tenants' rent will continue to narrow." Bank of America analysts said that the cooling of rent and owner-equivalent rent inflation in the coming months "should increase the Fed's confidence in the outlook for inflation."

As analysts widely point out, CPI reflects housing inflation for leases signed one or two years ago, when the number of people working from home surged and caused a severe shortage of housing. Currently, inflation for rental units on the market has fallen to near zero, which means that the pace of rent inflation will continue to slow. Since rent accounts for 34.2% of overall CPI and 43.0% of core CPI, this slowing down is of great significance for measuring inflation through the CPI indicator.

The Federal Reserve has been closely monitoring the inflation process in the non-housing services sector. Medical care services account for a quarter of the CPI category. In May, medical service prices rose 3.1% YoY and 0.3% MoM. Before the pandemic, healthcare inflation was typically about 1.0% higher than overall inflation annually. During the pandemic, its performance lagged behind overall inflation. This inflation is still close to 3.0%, which means that healthcare costs are putting increasing pressure on people's budgets and the economy. MoM in June is likely to reach 0.3% again.

When will the Federal Reserve cut interest rates? Although Fed officials acknowledge that recent inflation has made more progress, they insist that they still need more confidence in cooling inflation before starting to cut interest rates.

Despite Federal Reserve officials acknowledging that recent inflation has made more progress, they insist they still need more confidence in cooling inflation before starting to cut interest rates.

This week, Federal Reserve Chairman Powell admitted during a congressional hearing that recent data has made "modest further progress," but he stated that more progress is still needed. He said, "More good data will strengthen our confidence in inflation moving towards 2%." He added that the Federal Open Market Committee (FOMC) will continue to "make decisions at successive meetings." As for the timing of interest rate cuts, he still does not want to provide a specific view.

According to the CME FedWatch tool, the bond futures market expects a 68% probability of a 25 basis point rate cut by the Federal Reserve in September, and a 95.3% probability of maintaining rates in August, with a only 4.7% chance of interest rate cuts. They are almost unanimous in predicting that the Federal Reserve will maintain interest rates at a meeting later this month.