Even if June headline CPI comes in near 0 % m/m (≈ 2.3 % y/y), policy-rate relief is unlikely while short-term bills trade on the Fed’s floor and fiscal worries linger.
1. Components that drive ~50 % of the index
- Energy (~7 % weight)
- Regular gasoline: roughly flat month-on-month.
- Diesel No. 2: retail price up about 3 % m/m.
- Shelter (~33 % weight)
- Average 30-yr fixed mortgage rate slipped to 6.79 % in June from 6.84 % in May (-0.6 %).
- Average 30-yr jumbo fell to 6.93 % from 7.01 % (-1.1 %). Softer financing costs should cap fresh rent pressure, but the shelter index lags by 6–12 months.
- Core services ex-shelter remains exposed to higher labor costs, yet the PCE deflator used in 10-yr real-yield calculations stayed near 2.30 % in June.
2. What the arithmetic implies
Energy’s uptick and easing shelter costs offset each other, leaving June CPI likely near 0 % m/m. Base-effect math keeps the y/y rate around 2.3–2.4 %, almost unchanged from May.
3. Why the Fed still can’t cut
- Rate-gap rule of thumb: The Fed likes at least a 25 bp cushion between its target range and the 13-week bill yield. Bills sit near 4.25 % while the policy floor is 4.50 %—gap too slim.
- Fiscal optics: FY-to-date deficit already exceeds $1.4 tn; June’s Treasury statement (due 10 July) is unlikely to show meaningful improvement, especially with renewed defense outlays.
- Policy overhang: Markets fear potential tariff rounds signaled by President Trump more than a benign CPI print, keeping inflation risk-premia sticky.
4. Blame game: Powell and Trump
- Powell: Passed on trimming rates in Sept 2024 when headline inflation neared 3 %; that window is shut.
- Trump: Combines aggressive tariffs and deficit-fueling tax cuts, forcing the Fed to stay restrictive even as real-sector inflation cools.
5. Trading takeaway
Barring an upside shock in core services, the CPI release is unlikely to break the market out of its summer range. Instead, watch for:
- Demand at upcoming Treasury-bill auctions (rate-cut timing signal).
- June Monthly Treasury Statement (deficit trend).
- White House tariff headlines (risk-premia swing factor).