Fed's Preferred Inflation Gauge Expected to Show Cooling Prices

The Federal Reserve's preferred inflation gauge is expected to show that consumer prices fell in June due to a temporary drop in gasoline prices. This is according to economists surveyed by Dow Jones Newswires and The Wall Street Journal, who predict a 3.7% annual increase in the Consumer Price Index (PCE) for June, down from 4.1% in May.

The 'core' price index, which excludes volatile food and energy prices, is expected to edge down to a 3.3% annual increase, down from 3.4% in May. The Fed uses this core index as the benchmark for determining whether inflation is running at its target of 2% annually.

The report will come too late to influence the Fed's decision on Tuesday and Wednesday whether to raise interest rates to counteract high inflation. As of Monday, financial markets were pricing in a 38% chance the Fed would raise its fed funds rate by a quarter point, according to the CME Group's FedWatch tool.

However, some economists are cautious about the impact of the Iran War on global fuel supply chains. David Mericle, chief U.S. economist at Goldman Sachs, wrote that 'the re-escalation of the war with Iran and attacks on Russian oil refineries have pushed energy prices higher and revived fears that the already lengthy series of supply shocks could continue.'

Meanwhile, forecasters at Morgan Stanley anticipate a mixed bag of price increases and decreases within core inflation. They expect a modest acceleration in core goods inflation, driven by another strong increase in software prices.