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Buckle up for a pivotal inflation readout that could seal the deal for imminent Fed rate cuts! On Thursday morning, all eyes will zero in on June's Consumer Price Index (CPI) data drop, with markets bracing for another descent in inflationary pressures.
Should headline CPI print its expected 3.1% annual rise as economists forecast, it would mark the smallest 12-month increase since January's pace. That steady deceleration trajectory builds a compelling case for the Federal Reserve to finally hit the easing cycle button in the coming months.
Even more promisingly for rate relief hopes, core CPI stripping out volatile food and energy costs is projected to cool slightly on an annual basis to 3.4% growth. Month-over-month, core prices are expected to rise just 0.2%, exactly matching May's muted pace.
A downshift in pricing pressures aligns perfectly with Fed Chair Jerome Powell's recent rhetoric demanding more "good data" confirming inflation's return to the 2% target before greenlighting easier policy. With job market momentum also showing nascent cracks, all signs point toward the central bank capitulating soon on its aggressive rate hike campaign.
While consensus forecasts skew relatively tame heading into Thursday's 8:30am ET release, any material underruns versus expectations could double down on imminent easing speculation. Conversely, upside surprises threatening to reignite inflation fears would severely dampen currently buoyant rate cut odds for late-2024.
So just how pivotal is this seemingly pedestrian monthly data point? Put simply, June's CPI prints represent a fork-in-the-road moment for Fed policy shaping everything from stock prices to consumer spending to the trajectory of the US economy itself.
"We expect the June CPI report to be another confidence builder following the undeniably good May report," proclaimed Bank of America economists Stephen Juneau and Michael Gapen. "While the anticipated numbers are not quite as low as May, it would be a good print for the Fed."
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Indeed, further disinflation clears the path for central bankers to start reversing their aggressive rate hiking cycle implemented over the past 18 months. Markets already price around 75% odds for a 25 basis point cut by September, with potentially another move lower by year-end.
Supporting this dovish pivot, inflationary relief valves continue opening across multiple fronts:
BofA expects ongoing shelter inflation moderation to bolster the disinflationary trend, "which should add to the Fed's confidence on the inflation outlook." This key services component has remained stubbornly elevated despite goods pricing rollover.
Elsewhere, Goldman Sachs economists led by Jan Hatzius cite "rebalancing in the auto, housing rental, and labor markets" fueling their updated 3.2% year-end core CPI forecast, down from 3.5% prior. The firm's 2.7% core PCE (the Fed's preferred gauge) outlook for December also represents welcome progress.
At the same time, cooling aggregate demand and restored supply chains promise to relieve upward pricing pressures across countless consumer products and raw material inputs. Simply accomplishing the much-anticipated re-anchoring of longer-term inflation expectations could provide a psychological boost.
So while benchmark CPI metrics remain far too elevated for FOMC tastes at present, unmistakable momentum clearly favors the doves camped out across Constitution Avenue. Each healing data pulse strengthens their case that the punishing inflation scourge is waning without need for further belt-tightening brutality.
Of course, the other side counters that cutting rates too hastily could quickly reignite inflationary fires barely contained. Bears also caution that historically, inflationary shocks require years of restrictive policy overcorrection before returning to target regimes.
But moderating core service inflation trends suggest the most pernicious pricing pressures are finally starting to abate. If June's data can validate these suspicions, Chair Powell will be hard-pressed to avoid pulling some accommodation punches.
Yet as momentous as this week's CPI verdict could prove, it represents just the opening salvo in coming months' volley of crosscurrent economic evidence. Will leading indicators like payroll growth and business spending soon corroborate easing price pressures? Or will overheating service sector wage inflation renew stagflation jitters into autumn?
Only time will tell - but June's CPI data promises to crystallize the near-term battle lines. For dyed-in-the-wool hawks, any disappointment ramps up pressure to maintain punishingly restrictive rates despite slowing growth risks. Their dovish foes will counter upside surprises merely reaffirm disinflation's glacial progression justifying preemptive rate cuts to prevent overcooking the economy.
So brace for imminent fireworks and whipsawing narratives over the coming 24 hours. Because if this supposedly sleepy data release catches fire as expected, a prolonged period of turbulent Fed policy speculation surely awaits. The only certainty? June's CPI data is about to elevate heartburn for traders hedging every inflation at the Federal Reserve.
