June CPI expected to show headline easing to 3.8%, but oil above $80 and World Cup distortions complicate the Fed outlook. Markets price 43% odds of a July hike.
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The June US CPI report lands this afternoon, and the setup is anything but clean. Oil is back above $80 a barrel after the US-Iran conflict flared up again, WTI crude clipping that level and Brent touching $85 earlier. That complicates the inflation story just weeks after the ceasefire deal was signed.
Headline annual inflation is expected to ease to 3.8% from 4.2% in May, helped by a sharp drop in gasoline prices. Energy costs are estimated to fall more than 5% month-on-month after the surge from March through May. Core annual inflation is seen at 2.8%, down marginally from 2.9%.
The World Cup running through most of June and into July adds a wild card. It is usually a quieter period for US sporting events, so hosting the biggest one could distort certain CPI categories. Food and lodging are the ones to watch. Lodging costs in particular are expected to potentially double the May inflation rate, rising 0.8% month-on-month.
Bank of America aggregated credit and debit card data shows the tournament has boosted retail activity across the 11 US host cities. "In the three weeks ending 27 June, brick-and-mortar spending at restaurants and bars was up 5.3% y/y in the host cities, vs. 3.8% in the rest of the US," the bank noted. That data only covers US-based customers, so the real boost from international tourist spending is likely larger.
Markets are pricing in roughly 43% odds of a rate hike in July, with a full 25 basis point hike now priced for September next. Those odds will determine the market reaction to the CPI print. A hot number would reinforce the case for the Fed to hold rates higher for longer. A soft print would revive bets on a September cut.
Analysts surveyed by MNI are watching for any sign that the oil-driven inflation pressure is feeding through to core services. The data is due at 8:30 a.m. ET.
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