In our desire to experience lower interest rates during the second half of the year, two weeks ago we had the release of the first part of our economic “one-two” punch. As we reported, the jobs report indicated progress towards our lower rate goal. Next up? Our monthly reports on inflation. Last week we experienced the second leg of the equation with the release of the consumer and producer price indices.

First the Consumer Price Index showed that inflation at the retail level fell 0.1% from last month and rose 3.0% year-over-year. This was the first time that prices have fallen monthly in the U.S. since the start of the pandemic. Excluding the volatile components of food and energy, the monthly increase was 0.1% and the annual increase was 3.3%. On the wholesale side, the Producer Price Index gained 0.2% monthly and 2.6% year-over-year. The core PPI came in at no change monthly and 3.1% annually. The next question is—how do we interpret this data, especially coupled with the jobs report?

Overall, we had a moderate jobs report with wage inflation also moderating, but still above the Fed’s target. The inflation data was also seen as moderating. Taken together, these reports increased the chances that long-term interest rates will continue to fall in the coming months. The general forecast for the Fed’s meeting at the end of this month still predicts no change in short-term interest rates. However, there is increased hope that the Fed’s language will soften regarding future changes. And perhaps there is a glimmer of hope for a surprise reduction in July. As a reminder, long-term rates such as mortgage interest rates can move in anticipation of the Fed’s actions. Indeed, we have already seen some progress in this regard—though there is much more work to be done.