June CPI preview: Some payback for May, but downward trend remains

Summary

Consumer price inflation likely firmed in June relative to May but remained on a downward trajectory through the month-to-month noise. We estimate headline CPI rose 0.1% in June, with a decline in gasoline prices helping keep the overall increase in prices tame. The core index also looks to have rebounded slightly. We expect core CPI to register a “high” 0.2% gain (0.24% before rounding) after posting the smallest monthly gain in three years in May (0.16%). While a bounce back in core services ex-housing is likely to propel the pickup, favorable seasonal factors and broadly easing price pressures should mitigate the extent of June's rebound.

Overall, we expect June's CPI report be consistent with inflation slowing on trend. A 0.24% increase in June would be a noticeable step down from the 0.35% average monthly pace registered in the first quarter. If realized, the three-month annualized rate of core CPI would slow to 2.8% from 4.5% in March and 3.3% in December. While additional improvement on the inflation front is likely to remain slow-going when compared to the rapid reduction registered over 2022 and 2023, we continue to expect inflation to grind lower in the months ahead as input cost pressures ease and more tepid consumer demand makes it harder to raise prices.

Less favorable than May, but clear improvement from Q1

Last month's CPI report delivered the first clear piece of good news on inflation this year. The Consumer Price Index held steady in May, marking the first month prices did not increase since the summer of 2022. Excluding food and energy, prices advanced 0.16%, which was the smallest rise in nearly three years and a tenth below consensus expectations. The CPI's tamer readings were echoed by the PCE deflator, the Fed's preferred inflation gauge. The core PCE index rose 0.08% over the month, half the pace of the FOMC's 2% target when measured on an annualized basis. May's soft inflation data leave some wiggle room for the next few inflation prints to come in a little stronger yet still give the FOMC the “greater confidence” it seeks that inflation is on its way back to 2% on a sustainable basis. That bit of extra space could come in handy following June's inflation data to keep a September rate cut on the table. We look for the core CPI to come in slightly higher on an unrounded basis (0.24%), although that would still mark a step down from the 0.35% average registered in the first four months of the year. The resumption of the downward trend in core inflation should be made evident by the three-month annualized rate slowing to 2.8% from 4.5% in March and 3.3% in December, even as the year-over-year rate moves a touch higher (Figure 1).

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