The June Consumer Price Index (CPI) report surprised economists by coming in cooler than expected, showing a 0.1% decrease in inflation month-over-month instead of the anticipated 0.1% rise. PGIM Fixed Income chief US economist Tom Porcelli and EY chief economist Greg Daco join Morning Brief to discuss their economic outlook and potential Federal Reserve interest rate cuts in the wake of this report.
Porcelli suggests that inflation is “on the train” towards allowing a Fed cutting cycle, noting that the CPI data provides the Fed with “quite a bit of comfort.” However, he points out that the shelter cost component has “some calculation issues,” explaining why the Fed created a “super core measure” of inflation.
“If you just look at headline CPI and core CPI and strip out shelter from both of those, you’re now under 2%. You’re running at a 1.8% pace,” Porcelli tells Yahoo Finance, emphasizing that inflation is on par with the Fed’s inflation target.
Daco views this as an “optimal time” to “recalibrate monetary policy to today’s circumstances and tomorrow’s outlook.” He highlights significant economic changes, including cooling inflation, slower consumer spending, continuing disinflationary trends, and weakening labor markets. Daco underlines the fact that the June CPI data supports this trend: “These types of reports… are exactly the type of report the Fed is looking for.”
“I think the Fed should take note of this increased consumer prudence and recalibrate monetary policy, again, to today’s economic realities,” Daco tells Yahoo Finance.
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