Energy prices have fallen, and are expected to cool overall CPI in the United States, but prices for services such as healthcare and insurance remain high, making whether core inflation approaches 3% again the real focus.

Source: Jinshi Data

On July 14 (Tuesday), the U.S. market will迎来 the most anticipated day of the week.

At 20:30 that day, the U.S. Bureau of Labor Statistics (BLS) will release the June Consumer Price Index (CPI) report, while newly appointed Federal Reserve Chairman Waller will also attend a hearing at the House Financial Services Committee. This is not only the last significant inflation data before the July FOMC meeting but also Waller's first appearance before Congress since taking office.

The combination of these two events may jointly determine the market's judgment on the Fed's next policy path. The focus of the market is on whether overall inflation continues to cool, whether core inflation remains stubborn, and whether Waller will release further policy signals during the hearing.

For investors, this "Super Inflation Day" needs to observe four key aspects: whether overall CPI significantly cools due to the drop in energy prices; whether core CPI rises back to around 3% year-on-year; whether healthcare, insurance, and other core service prices continue to be the main source of inflation; and whether Waller releases clearer policy signals during the hearing, including how to assess the latest inflation data, whether he believes current rates need further adjustment, and how to view the situation in the Middle East, energy prices, and future inflation expectations.

Energy prices have fallen, overall CPI is expected to cool

After an unexpected rise in May, the market generally expects improvement in overall inflation for June.

In May, the overall CPI in the U.S. increased by 0.5% month-on-month and by 4.2% year-on-year, accelerating for the second consecutive month. Among these, energy prices contributed about 60% of the month-on-month increase and were the main factor driving the rise in inflation.

However, entering June, the energy market showed a clear cooling trend. With a ceasefire agreement reached between the U.S. and Iran, and the resumption of some navigation through the Strait of Hormuz, international oil prices fell by about 20% from their high points, and American gasoline prices also decreased correspondingly. Data from the American Automobile Association (AAA) once showed that the national average gasoline price had dropped from over $4.50 per gallon to $3.84 per gallon.

The fall in energy prices means that overall CPI in June is expected to slow significantly. The market's median expectation shows that overall CPI is expected to drop by 0.1% month-on-month in June, and year-on-year is expected to fall to 3.8%; core CPI is expected to record an increase of 0.2% month-on-month, with a slight year-on-year decrease to 2.8%.

Core inflation truly determines Fed policy

Compared to overall CPI, the Federal Reserve pays more attention to core inflation, excluding food and energy, as the latter better reflects domestic price pressures in the U.S.

Currently, most economists expect that June's core CPI will still rise by 0.2%-0.3% month-on-month, with a year-on-year rate of about 2.9%-3%. If the year-on-year rate rises back to 3%, it would indicate that the improvement process of core inflation in the U.S. may stagnate, and the price pressures in the service sector remain stubborn, providing further reasons for the Fed to maintain current rates.

What the market is actually more concerned about is the "Super-core Inflation" in the preferred core PCE index of the Fed, which excludes housing costs from core service prices and includes healthcare, insurance, financial services, transportation, etc., and is considered to best reflect the underlying inflation in the U.S. service sector.

Data shows that since February this year, the year-on-year growth rate of super-core PCE has risen to 3.9%, significantly above the Fed's long-term target of 2%. Among these, medical services remain the biggest driving factor, and prices for insurance and financial services also continue to rise rapidly.

Inflation pressure is shifting from cyclical to structural

Before the CPI announcement, a recent study released by the San Francisco Fed provides a new perspective for the market to understand the current U.S. inflation.

The study categorizes inflation into cyclical and non-cyclical inflation. The former is mainly influenced by economic prosperity and changes in demand, while the latter is driven more by structural factors such as healthcare, labor costs, and industry supply, usually persisting longer and being harder to roll back.

The research indicates that since 2023, cyclical inflation has been decreasing, while non-cyclical inflation has been continuously rising, currently reaching about 3.9%, exceeding cyclical inflation and becoming the main source of inflation in the U.S.

It is worth noting that historical experience shows that non-cyclical inflation often leads changes in overall core inflation. At the same time, the contribution of medical services to core PCE continues to expand and shows an accelerating trend.

This suggests that even if energy prices cause a drop in overall CPI, the structural inflation pressure in the U.S. service sector has not significantly eased.

Meanwhile, the benefits brought by the drop in energy prices also come with considerable uncertainty. Recently, the conflict between the U.S. and Iran has escalated again, and shipping through the Strait of Hormuz has been affected once more. Data from the International Monetary Fund (IMF)'s PortWatch shows that the number of ships passing through the Strait of Hormuz has significantly decreased again recently.

As an important shipping route that accounts for about one-fifth of the world's maritime crude oil transport, if transportation through the Strait of Hormuz is blocked again, international oil prices may rise again and create new upward pressure on U.S. inflation in the coming months.

Waller's Congressional hearing may amplify market volatility

In addition to CPI data, another market focus that day is Federal Reserve Chairman Waller's appearance at a Congressional hearing.

This is Waller's first public questioning by lawmakers since taking office, and it happens just after the latest inflation data is released. The market will pay close attention to how he evaluates the latest CPI data, the current inflation situation, and future interest rate policies.

The June FOMC meeting has already released more hawkish signals. Due to prior inflation consistently exceeding expectations, the Fed increased its median inflation forecast for 2026 from 2.7% to 3.6%, while also raising its median forecast for the federal funds rate from 3.4% to 3.8%, indicating that the decision-makers expect rates to remain high for a longer period, and even the possibility of rate hikes.

Recently, internal views within the Fed on the inflation outlook have also diverged. New York Fed President John Williams believes that housing inflation is slowing; Chicago Fed President Austan Goolsbee, on the other hand, warns that there remains a risk of inflation rising again.

Bank of America Securities strategist Mark Cabana stated that the June CPI is the last critical economic data before the July FOMC meeting, and differing data structures may bring market expectations of further rate hikes and maintaining rates closer to equilibrium.