CPI to Print Negative for June

Based on the 30% drop in oil prices and the 18% drop in gasoline prices over the last month, we are forecasting that CPI will be negative .18% for June with core at only positive .24%.  This trend should continue in July as average prices continue to decline, particularly for gasoline where high refining margins are likely to decline over time.  These negative prints make the chance of Fed rate hike this year near zero.  We are forecasting that oil prices drop to below $60/barrel as OPEC. Including Iran, starts to produce at maximum production of 33MM barrels per day.

We project that reported PCE Core will decline from the current 3.4% y/y to below 2.5% over the next year as airline fares decline, shelter gradually starts to reflect market prices and tariffs continue to roll off.  This decline should allow the Fed to cut rates 3 times over the period.  It is important to note that the 10-year yield of 4.37% is already pricing in one Fed rate cut as the 10-year yield normally trades at 100 over the terminal Fed Funds rate and the 10-year rate is a far more liquid and reliable indicator than Fed Funds futures. 

We are also hopeful that the Warsh task force will reform the price indices to reflect real-time market prices.  If that occurs, the revised indices will show that Core PCE is already below the Fed’s arbitrary 2% target.  We publish PCE-R, which is our estimate of real-time market inflation and it shows that inflation is already at the Fed’s target.