CPI inflation came in line with expectations, easing pressure on the Fed to hike rates
✅ July’s inflation print was encouraging as markets remain on edge ahead of the Fed’s September decision. While the decision has largely remained a coin flip, the odds of a rate hike next month have declined significantly following the jobs report and now the latest inflation data.
📉 Several key inflation categories that feed into the Fed’s preferred inflation metric—PCE inflation—were mostly subdued in July.
⚡ The inflation story has, for the most part, been driven by supply disruptions affecting energy and energy-related products.
Often, the most concerning part of inflation—and what makes it sticky—is labor costs. This time around, we do not see labor costs rising meaningfully enough to keep inflation elevated.
Whether due to the rapid development of AI or subdued overall labor demand, there is not much pressure on wage growth comparable to what we saw three years ago.
Our call for no rate hike this year looks much stronger now than it did before.
0.2% monthly core CPI was right on the bubble. A lower print would have taken some pressure off the Fed. A higher print would have added to the pressure. But this did neither.
Still, the Fed needs to hike rates. 0.2% monthly July core CPI is consistent with 3.3 percent annual July core PCE. Core PCE has been increasing for over a year. The unemployment rate has been low and stable for two years. Financial conditions are arguably easier than they were one year ago, and have been stable or falling over the summer.
Still, the Fed needs to hike rates. 0.2% monthly July core CPI is consistent with 3.3 percent annual July core PCE. Core PCE has been increasing for over a year. The unemployment rate has been low and stable for two years. Financial conditions are arguably easier than they were one year ago, and have been stable or falling over the summer.
July's CPI report released this morning delivered encouraging news for investors and policymakers alike. Core inflation (which excludes volatile food and energy prices) increased by just 0.2% for the month and 2.5% on a year over year basis, thereby matching the slowest pace since March 2021, and matching consensus estimates. The headline CPI index increased by 3.4% during July, matching estimates, and representing a slight deceleration versus the 3.5% increase seen in June.
While headline inflation numbers matched estimates for June, underneath the surface there were several interesting developments. Grocery prices declined for the first time since March, helped by lower prices for lettuce amidst the cyclospora outbreak. However, the cost of dining out increased by 0.3% during July and increased by 3.4% on a year over year basis as dining outlets continue to hike menu prices. In addition, computer software and accessories prices increased by an eye-watering 21.2% during July, while the cost of computers and peripherals increased by the most in more than four years (Bloomberg).
Following the latest CPI data, the Federal Reserve may have more flexibility to remain patient heading into its September meeting. With inflation not reaccelerating and employment growth showing signs of slowing, investors are increasingly focused on incoming economic data and comments from Fed Chair Kevin Warsh at Jackson Hole later this month.