Consensus Points To Another Cooling US Inflation Report, But What If Economists Are Wrong?

Few analysts and economists foresee inflation continuing to run hot, and investors will have additional clarity with the release of the CPI report by the Bureau of Labor Statistics on Tuesday at 8:30 a.m. ET, which could mark the twelfth consecutive decline in the U.S. annual inflation rate.

The consensus seems to lean towards one side, with economists projecting a decline in headline annual inflation from 4% to 3.1%. Core inflation, which excludes energy and food, is seen falling from 5.3% to 5%.

If this turns out to be the case, it would also mark the lowest inflation print since March 2021.

Read also: Goldman Sachs Predicts Extended Disinflation: These 3 Consumer Categories Could See Significant Price Drops

Used Cars Create Downside Risks To Inflation: Bank of America

Bank of America’s U.S. economist, Michael Gapen, forecasts a 0.3% monthly increase in both core and headline inflation in June. On an annual basis, overall inflation is expected to fall from 4% to 3.1%, while core inflation is projected to ease from 5.3% to 5%.

“One major factor behind our forecast for a deceleration in core inflation is used car prices,” Gapen wrote in a note.

Used car prices pose a downside risk, as noted by Bank of America analysts, as wholesale used car prices, according to Manheim, have declined for three consecutive months since April, reversing the growth seen from December to March.

Rents Are Plummeting For New Tenants

Jeffrey Roach, chief economist for LPL Financial, highlights the significant drop in rent costs for new tenants, which is expected to exert downward pressure on shelter inflation.

The analyst also points out that input prices have fallen in recent months, indicating less inflationary pressure on producers. For instance, producer prices for foods have decreased considerably since the beginning of the year.

Pressure on Fed to Hold Rates Steady Mounts

Oliver Rust, head of product at independent inflation data aggregator Truflation, notes that the most significant downward price movement has occurred in utilities, clothing, car purchases, communications, and health.

Much of this pressure is driven by demand rather than supply, explaining why goods are experiencing a more pronounced price drop compared to services.

Truflation’s model indicates that the June CPI figure will be 3.1%. However, by the end of the year, a tight labor market and rising house prices will push inflation up to 3%-3.5%.

This leaves the Federal Reserve in a difficult position. While the market expects another 25 basis point interest rate increase, the declining inflation puts immense pressure on the Fed to hold rates steady at this month’s meeting.

Markets Predict Only One Rate Hike In 2023

Investors have nearly fully priced in a 0.25% rate hike in July but remain skeptical about the Fed’s ability to continue raising rates after the summer.

According to the latest CME Fedwatch Tool, the probability of a further rate hike by November stands at 33%, ahead of the inflation report.

If inflation matches the hopeful expectations of the majority of Wall Street analysts, the market could further solidify its expectations of just a single-rate hike.

On the other hand, a higher-than-expected inflation surprise, possibly signaled by a persistent high core print, could shake the markets and lead to a repricing of higher Fed rate expectations.

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