Inflation Slows More Expected To 3% In June, Heightens Expectations For Rate Cuts: Treasury Yields Tumble

The Consumer Price Index in the United States slowed more than expected in June, providing further signs of progress Thursday toward returning to the Federal Reserve’s 2% inflation target and maintaining high expectations for a near-term kickoff of interest rate cuts.

Last month, the average increase in a basket of goods and services measured by the Bureau of Labor Statistics was 3% compared to June 2023, slightly cooler than economist forecasts of 3.1%. The June report marks the third consecutive decline in the inflation rate, a trend not observed since May 2023.

June Inflation Report: Key Highlights

• Headline CPI inflation slowed from 3.3% in May 2024 to 3% in June 2024 on a year-over-year basis, below the 3.1% expected among economists, as tracked by TradingEconomics.
• On a monthly basis, inflation contracted by 0.1% compared to May 2024, decelerating from the previous flat reading and marking the lowest print since May 2020.
• The gasoline index dropped by 3.8% month-over-month, following a 3.6% decrease in May. The energy index also declined by 2.0% for the month, matching the previous month’s decrease. The food index saw a 0.2% increase in June, with food away from home rising by 0.4% and food at home up by 0.1%.
• Core inflation, which excludes energy and food items, came in at 3.3% year-over-year, below estimates of 3.4% and decelerating from the previous 3.4% reading.
• On a monthly basis, core inflation rose by 0.1%, slowing from both the previous and expected 0.2%.
• Items that increased in June were shelter, motor vehicle insurance, household furnishings and operations, medical care, and personal care. On the other hand, airline fares, used cars and trucks, and communication were among the items that saw a decrease during the month.

Market Reactions

Prior to the inflation report, traders had assigned a 71% chance of a September rate cut and had factored in two rate cuts by the end of the year.

The lower-than-expected inflation report pleased market participants, bolstering expectations for Fed rate cuts and driving equity futures higher in premarket trading.

Contracts on the S&P 500 Index ? broadly tracked by the SPDR S&P 500 ETF Trust (SPY) ? rose 0.5% by 8:35 a.m. ET, while Nasdaq 100 futures increased by 0.6%.

Treasury yields tumbled, with the 10-year yield down by 10 basis points to 4.18%. The rate-sensitive two-year yield plummeted 11 basis points to 4.51%.

On Wednesday, the iShares 20+ Year Treasury Bond ETF (TLT) gained 0.3%, recouping Tuesday’s losses.

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