The upcoming July Consumer Price Index (CPI) report is expected to reinforce the slowing inflation trend, according to analysts at Wells Fargo.
While not yet fully on track with the Federal Reserve's target, Wells Fargo expects the report to show significant progress.
The bank forecast that headline CPI would increase by 0.2% in July, keeping the annual rate at a three-year low of 3.0%.
"Core CPI is also expected to increase 0.2% in July following the recovery in some of the more volatile 'core' components," said the analyst.
They also expect the recent decline in housing inflation to continue, along with reduced prices for core goods. If this forecast is correct, the 12-month change in core CPI will reach a new cycle low of 3.2%.
Looking ahead, Wells Fargo predicts inflation will continue to moderate. They emphasized that labor costs are no longer a significant threat to the Federal Reserve's 2% inflation target due to increased labor force growth and reduced demand for workers.
Additionally, weak consumer demand is pushing down prices, particularly for consumer goods and services, returning inflation to pre-pandemic levels.
While core Personal Consumption Expenditure (PCE) inflation may remain around current rates through the end of the year, Wells Fargo expects the annual rate of inflation to be in line with the Federal Open Market Committee's (FOMC) target.
Given the worrisome state of the labor market, they expect the Federal Reserve to consider inflation close enough to target and possibly begin a cycle of rate cuts at its next meeting.
