Economics
CPI inflation report June 2024:
The monthly inflation rate dipped in June for the first time in more than four years, providing further cover for the Federal Reserve to start lowering interest rates later this year.
The consumer price index, a broad measure of costs for goods and services across the U.S. economy, declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years, the Labor Department reported Thursday. The all-items index rate fell from 3.3% in May, when it was flat on a monthly basis.
This was the first time since May 2020 that the monthly rate showed a decrease.
Excluding volatile food and energy costs, so-called core CPI increased 0.1% monthly and 3.3% from a year ago, compared with respective forecasts for 0.2% and 3.4%, according to the report from the Bureau of Labor Statistics.
The annual increase for the core rate was the smallest since April 2021.
A 3.8% slide in gasoline prices held back inflation for the month, offsetting 0.2% increases in both food prices and shelter. Housing-related costs have been one of the most stubborn components of inflation and make up about one-third of the weighting in the CPI, so a pullback in the rate of increase is another positive sign.
Stock market futures rose following the release while Treasury yields tumbled.
The June inflation report means the Fed is “one step closer to a September rate cut,” said Chris Larkin, managing director of trading and Investing at E-Trade from Morgan Stanley. “A lot can happen between now and September 18, but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified.”
In addition to the pullback in energy prices and the modest increase for shelter, used vehicle prices decreased 1.5% on the month and were down 10.1% from a year ago. The item was one of the main drivers in the initial surge in inflation back in 2021.
The tame inflation report meant that real average hourly earnings for workers increased 0.4% monthly, though they were still up just 0.8% from a year ago, according to a separate BLS report.
While Fed policymakers target inflation at 2% annually, the June CPI report provides further ammunition that the trend in prices is headed in the right direction.
The CPI peaked above 9% in June 2022, prompting the Fed to respond with a flurry of interest rate hikes that concluded in July 2023. Since then, the central bank has held its benchmark borrowing rate in a range between 5.25%-5.50%, even as inflation has fallen sharply over the past few years.
Following the report, traders in the fed funds futures market increased their bets that the central bank would lower rates starting in September.
“The latest inflation numbers put us firmly on the path for a September Fed rate cut,” said Seema Shah, chief global strategist at Principal Asset Management. “The smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1’s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year.”
Though Fed officials at their June meeting indicated the likelihood of one quarter percentage point decrease this year, markets now are pricing in an initial cut in September followed by at least one by the end of the year, according to the CME Group’s FedWatch tracker of futures contracts. Moreover, traders were even pricing in about a 40% probability of a third cut by December.
In other economic news Thursday, the Labor Department reported that weekly jobless claims fell to 222,000, a decrease of 17,000 from the previous week and the lowest level since June 1. Continuing claims, which run a week behind, nudged lower to 1.85 million.
Correction: The Labor Department reported the CPI data on Thursday. An earlier version misstated the day.
Production at the VW plant in Emden.
Sina Schuldt | Picture Alliance | Getty Images
The struggling German economy has been a major talking point among critics of Chancellor Olaf Scholz’ government during the latest election campaign — but analysts warn a new leadership might not turn these tides.
As voters prepare to head to the polls, it is now all but certain that Germany will soon have a new chancellor. The Christian Democratic Union’s Friedrich Merz is the firm favorite.
Merz has not shied away from blasting Scholz’s economic policies and from linking them to the lackluster state of Europe’s largest economy. He argues that a government under his leadership would give the economy the boost it needs.
Experts speaking to CNBC were less sure.
“There is a high risk that Germany will get a refurbished economic model after the elections, but not a brand new model that makes the competition jealous,” Carsten Brzeski, global head of macro at ING, told CNBC.
The CDU/CSU economic agenda
The CDU, which on a federal level ties up with regional sister party the Christian Social Union, is running on a “typical economic conservative program,” Brzeski said.
It includes income and corporate tax cuts, fewer subsidies and less bureaucracy, changes to social benefits, deregulation, support for innovation, start-ups and artificial intelligence and boosting investment among other policies, according to CDU/CSU campaigners.
“The weak parts of the positions are that the CDU/CSU is not very precise on how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” Brzeski said, noting that the union appears to be aiming to revive Germany’s economic model without fully overhauling it.
“It is still a reform program which pretends that change can happen without pain,” he said.
Geraldine Dany-Knedlik, head of forecasting at research institute DIW Berlin, noted that the CDU is also looking to reach gross domestic product growth of around 2% again through its fiscal and economic program called “Agenda 2030.”
But reaching such levels of economic expansion in Germany “seems unrealistic,” not just temporarily, but also in the long run, she told CNBC.
Germany’s GDP declined in both 2023 and 2024. Recent quarterly growth readings have also been teetering on the verge of a technical recession, which has so far been narrowly avoided. The German economy shrank by 0.2% in the fourth quarter, compared with the previous three-month stretch, according to the latest reading.
Europe’s largest economy faces pressure in key industries like the auto sector, issues with infrastructure like the country’s rail network and a housebuilding crisis.
Dany-Knedlik also flagged the so-called debt brake, a long-standing fiscal rule that is enshrined in Germany’s constitution, which limits the size of the structural budget deficit and how much debt the government can take on.
Whether or not the clause should be overhauled has been a big part of the fiscal debate ahead of the election. While the CDU ideally does not want to change the debt brake, Merz has said that he may be open to some reform.
“To increase growth prospects substantially without increasing debt also seems rather unlikely,” DIW’s Dany-Knedlik said, adding that, if public investments were to rise within the limits of the debt brake, significant tax increases would be unavoidable.
“Taking into account that a 2 Percent growth target is to be reached within a 4 year legislation period, the Agenda 2030 in combination with conservatives attitude towards the debt break to me reads more of a wish list than a straight forward economic growth program,” she said.
Franziska Palmas, senior Europe economist at Capital Economics, sees some benefits to the plans of the CDU-CSU union, saying they would likely “be positive” for the economy, but warning that the resulting boost would be small.
“Tax cuts would support consumer spending and private investment, but weak sentiment means consumers may save a significant share of their additional after-tax income and firms may be reluctant to invest,” she told CNBC.
Palmas nevertheless pointed out that not everyone would come away a winner from the new policies. Income tax cuts would benefit middle- and higher-income households more than those with a lower income, who would also be affected by potential reductions of social benefits.
Coalition talks ahead
Following the Sunday election, the CDU/CSU will almost certainly be left to find a coalition partner to form a majority government, with the Social Democratic Party or the Green party emerging as the likeliest candidates.
The parties will need to broker a coalition agreement outlining their joint goals, including on the economy — which could prove to be a difficult undertaking, Capital Economics’ Palmas said.
“The CDU and the SPD and Greens have significantly different economic policy positions,” she said, pointing to discrepancies over taxes and regulation. While the CDU/CSU want to reduce both items, the SPD and Greens seek to raise taxes and oppose deregulation in at least some areas, Palmas explained.
The group is nevertheless likely to hold the power in any potential negotiations as it will likely have their choice between partnering with the SPD or Greens.
“Accordingly, we suspect that the coalition agreement will include most of the CDU’s main economic proposals,” she said.
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