Signs of Declining Inflation Emerging, A Rate Hike Expected In July

<p>&nbsp;Yesterday's softer-than-expected data, along with signs of easing pandemic-era disruptions, provided further evidence of a headwind in inflation.</p><p><br /></p><p>Regarding future developments, we anticipate that the more moderate rate of price growth, as indicated by the June Consumer Price Index (CPI), will continue.</p><p><br /></p><p>There is room for vehicle prices to continue to decline, and the ongoing downward trend in inflation in base placements is expected to continue in the second half of the year.</p><p><br /></p><p>In addition, inflation of goods, other than vehicles, has the potential to slow down as supply chain pressure eases and input costs decrease compared to the previous year.</p><p><br /></p><p>However, achieving the Federal Open Market Committee's (FOMC) 2% inflation target accurately and continuously is far from certain.</p><p><br /></p><p>While wage growth may no longer be picking up, the tight labor market continues to push labor costs above a range consistent with 2% inflation over time.</p><p><br /></p><p><br /></p><p>Food and energy commodity prices have remained stable since the beginning of the year, and the deflationary impact of these categories is expected to diminish in the coming months.</p><p><br /></p><p>Although headline inflation has eased significantly from a 42-year high a year ago, we anticipate that the next phase of the decline in inflation will take place at a slower pace.</p><p><br /></p><p>Even in core CPI, where the strength of the decline in inflation in housing and vehicles is more pronounced, we expect core inflation in the second half of the year to be slightly above 3% on an annual basis.</p><p><br /></p><p>While this is an improvement over the core inflation rate of 4.6% in the first half of the year, it may not be enough for the FOMC to consider a rate cut.</p><p><br /></p><p>Instead, after another hike of 25 basis points at its next meeting on July 26, it is expected that the FOMC will take a wait-and-see approach, allowing the effects of previous compliance to run through the economy.</p><p><br /></p><p>However, with core inflation trending closer to 3% than 2%, our view is that a rate cut is still a long way off.</p>