PIMCO: US goods inflation makes interest rate cut more understandable
By Tiffany Wilding, Economist, PIMCO
The U.S. reported that inflation, as measured by the core Consumer Price Index (CPI), rose 0.2% month-over month in June, slightly below consensus expectations but firmer than prior months with increasing signs that companies are starting to pass on tariff costs to consumers.
Core goods ex auto inflation rose 0.6% m/m, the firmest print since 2022. However, despite higher goods inflation, overall core CPI was tempered by deflation in autos and travel services. Headline CPI also rose to 2.7% from 2.4% year-over-year, helped by both firmer food and energy prices in June as well as unfavorable base effects.
Overall this report held few surprises, and was broadly consistent with our full year core CPI forecast, which sees core CPI ending the year around 3.4% y/y (versus 2.9% y/y as of June). We continue to expect more goods inflation as companies pass on the costs of tariffs in the months ahead, which paired with somewhat firmer auto and travel services inflation in the second half, should bring core inflation back above 3%.
Despite a firmer core CPI print in June relative to May, we believe Federal Reserve officials will welcome this report – higher tariff related goods inflation justifies their more cautious stance, while continued disinflation across services categories should support rate cuts in September and beyond. We believe the fact that inflation is more concentrated in core goods categories will make it easier for the Fed to communicate why they are cutting rates while inflation is above target, with core services ex shelter currently running at 0.2% m/m.
