CPI comes in cool increasing rate cut odds in September.
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Wednesday morning, CPI data came in lower than expectations with a month over month change of 0.10%. After a hot print in January, month over month CPI change has not exceeded 0.20% which is a good sign that inflation is continuing to cool down. A likely concern for the Fed at this point is that inflation less food and energy has flatlined on a year-over-year basis since March, staying sticky at 2.8%. Energy prices have been a big driver of headline inflation numbers heading lower but crude oil prices have rebounded over the last few weeks, as we’ll discuss in today’s featured article. Vehicles, both new and used, have seen their prices increase far less than the overall basket of goods tracked. On the other hand, shelter inflation has remained elevated at 3.9% over the last year.
After CPI data release, odds of at least one rate cut by September moved slightly higher to just below 70% whereas it was just above 60% one day prior. This isn’t a large change in expectations, but it does show that if inflation behaves, rate cuts are on the horizon. The big roadblock right now is the unknown impact from tariffs and if energy prices will continue to descend. Intermediate term interest rate benchmarks like the US Treasury 10YR Yield Index (TNX) are near the middle of the range they have been in since the end of 2023. Therefore, while we may see rate cuts later this year, the market is not pricing in a drastic reduction in interest rates despite the cooler inflation data over the last few months.
