#USCoreCPIMissesExpectations

Inflation cools-unevenly.

U.S.

Core CPI rose 2.7% YoY in June, under the 2.8% consensus and decelerated from 2.9%.

Headline CPI, on the other hand, contracted 0.1% MoM-the first monthly decline since 2020.

Annually, CPI fell to 3.8% from 4.2% on the back of receding energy prices. While at face value this appears to be a clear disinflationary trend, the composition of inflation speaks a much more nuanced story. The Two-Speed Inflation Dynamic Speed One: Goods & Energy (Cooling Fast) Gas and energy prices softened headline CPI posted a negative monthly print input pressures eased This is the visible relief. This provides a lift to short-term market expectations and reduces expectations of consumer inflation.

Speed Two: Core Services (Still Sticky) Housing costs continue to be elevated car insurance premiums remain high core services inflation is still above target This is the focus of the Fed.

Goods deflation helps the overall headline number. Persistence in core services dictates monetary policy. Core services are still heating at levels the Fed does not want to see at their 2% objective.

Market Reaction Immediately post release: Likelihood of July rate hike fell from around 50% to under 45%. Treasury yields were down slightly and discussions around the timing of rate cuts picked up the pace. Markets are reacting to the change in the level, not the absolute level itself.

But it bears remembering 2.7% is progress, not success What the Fed Is Watching The Fed will not pivot based on a single headline MoM negative read.

What the Fed will be looking for are sustained drops in core services slowing wage growth a continued deceleration in shelter costs When that all comes into place, the Fed will remain hawkish in its policy commentary. Structural stickiness matters more to the Fed than fleeting energy price drops. Strategic Takeaway CPI has done three things: Confirms disinflationary trend and shows it’s continuing Reduces probability of a hike this month Does not give a signal for a rate cut next year. Now what can markets expect: next month provides a pivot point if services starts cooling down this would significantly raise the odds of a pivot If services does not start cooling down, expect market to reset expectations once again.

The Bottom Line A negative monthly CPI reading is a powerful symbol, given this hasn't occurred since 2020.

But the Fed's concern extends to the sticky part of inflation, which is core services. Inflation is falling, but core services is not. As long as the two are out of alignment, market players will remain glued to data.

Progress, yes but mission accomplished?

Not quite.

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