Investing.com -- Citigroup analysts have revised their US rate cut forecast following the latest US inflation data, now predicting that the Federal Reserve will cut interest rates by 25 basis points at its upcoming meeting next week.
Following non-farm payroll data last week, Citi said it was "increasingly convinced the Fed will deliver multiple larger-sized cuts as the job market continues to cool."
However, it has now shifted that outlook is primarily driven by stronger-than-expected shelter inflation data.
The analysts noted that core Consumer Price Index (CPI) inflation rose by 0.281% month-over-month in June, exceeding its expectations. The most surprising component, according to the bank, was the owner's equivalent rent (OER), which increased by 0.50%, the strongest reading since January.
While this suggests a potential resurgence in housing inflation, Citi believes it is more likely a temporary blip rather than a long-term trend.
Despite the stronger OER data, Citi analysts argue that core inflation remains slow enough to justify a rate cut.
"[The] advance in owner’s equivalent rent (OER) is probably just enough to convince the FOMC to cut 25bp rather than 50bp at next week’s meeting," wrote the bank.
The three-month annualized core CPI is currently at 2.07%, and the analysts project a benign 0.19% month-over-month core Personal Consumption Expenditure (PCE) inflation reading for August.
The labor market will continue to be a major focus for the Fed. Citi analysts expect a total of 125 basis points in rate cuts this year, with 50 basis points in November and December.
While the stronger OER data may lead to a more cautious approach to rate cuts, Citi believes that the overall economic picture still supports a rate reduction.
Citi's revised forecast suggests that the Fed is likely to take a more gradual approach to cutting rates, starting with a 25 basis point reduction next week.