Preview of the Consumer Price Inflation Report for June

A widely expected inflation report on Thursday could boost expectations that the Federal Reserve will cut interest rates in the coming months.

The June CPI report is due at 8:30 a.m. ET. Recent economic data has suggested that inflation and economic growth are slowing, including last week’s report that the unemployment rate rose to 4.1% in June.

Thursday’s report comes after Federal Reserve Chairman Jerome Powell testified for two days in Congress this week. The central banker did not indicate when he would begin cutting rates. However, Powell said the Fed sees risks to the economy as more balanced between inflation and recession and that the central bank does not need to wait until inflation hits 2% to cut rates.

Economists polled by Dow Jones forecast the CPI rising 0.1% on the month and 3.1% on the year. The core CPI, which strips out more volatile food and energy prices, is forecast to rise 0.2% from May and 3.4% since June of last year.

In May, the consumer price index remained unchanged on a monthly basis and rose 3.3% on a yearly basis.

Focusing on unemployment and inflation trends could strengthen the case for lower interest rates, said Matt Brenner, executive vice president of investments and product management at MissionSquare Retirement.

“Inflation remains relatively high relative to the Fed's 2 percent target. Unemployment remains historically very low at 4.1 percent. But the trend in both countries is that unemployment is gradually rising and inflation is continuing its downward path,” Brenner said.

“For a while now, the Fed has been more focused on levels, and now it seems to be leaning more towards focusing on trend. If that's the case, the chances of a rate cut will increase,” Brenner added.

Also on Thursday, attention will be focused on price changes in the components of the consumer price index, especially if the numbers come in worse than expected. Tony Roth, chief investment officer at Wilmington Trust, said housing and medical services could be key areas to watch.

Shelter and medical services also make up major parts of the personal consumption expenditures index, the Fed's preferred measure of inflation, rather than the CPI.

“We saw that medical services were somewhat modest, and that's important because medical services make up a much larger share of personal consumption expenditures, which is the more important of the two inflation prints,” Roth said.

The CPI report comes as markets are rallying.

Stocks and bonds rose in July as traders grew more confident that interest rates would be cut sometime this year. The S&P 500 index topped 5,600 for the first time on Wednesday.

Fed funds futures prices indicate that traders expect the Fed to hold rates steady at its meeting later this month and then cut them in September, according to the CME FedWatch tool. A month ago, the odds of another pause in September were close to zero, according to the same tool, which uses 30-day Fed funds futures to come up with implied probabilities.

The expected hold in July could prevent Thursday's CPI report from being a major market mover, Megan Sweeper, interest rate strategist at Bank of America, said in a note to clients on Wednesday.

“The slowdown in activity and the constraints on price cuts in the near term will limit the market’s response in any direction,” Sweeper said.

However, Roth of Wilmington Trust said stocks could rally if the inflation reading comes in lower than expected because some investors have not shaken off concerns from earlier this year, when inflation briefly spiked.

“I don't think the market has fully grasped the weakness in the economy, or the fact that inflation has been forgotten,” Roth said.

— CNBC's Michael Bloom contributed to this report.