In an unexpected twist, July saw a surge in headline inflation, marking the first acceleration in over a year due to a peculiar trend in year-over-year comparisons. However, a closer analysis of the underlying data reveals that the momentum of price increases is actually slowing down. This insight was revealed by the Consumer Price Index (CPI) on Wednesday, emphasizing the continued easing of rising prices. So, while the initial figures may appear perplexing, a deeper dive into the data unveils a more reassuring trend of inflationary pressures abating.
According to experts, the latest inflation report for July met the expectations, and this reinforces the argument that the Federal Reserve should maintain the current interest rates without making any changes during the upcoming Fed meeting.
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Headline CPI rose 3.2% on an annual basis in July, the Bureau of Labor Statistics said Thursday. That was higher than the 3% reading seen in June, as well as the first uptick in prices in 13 months. Comparisons against prior-year periods in which the pace of inflation was more volatile contributed to July’s increase. On a monthly basis, CPI rose 0.2% last month, or the same rate as seen in June.
More importantly, core CPI, which excludes volatile food and energy prices, posted its smallest back-to-back monthly increase in two years. July’s core CPI rose 0.2% after rising 0.2% in June. On an annual basis, core CPI increased 4.7%, which was in line with economists’ estimates.
Even though inflation is still higher than the desired 2% goal set by the central bank, the recently released July CPI data further strengthens the growing evidence that the Federal Reserve is making headway in its battle against the most severe inflation the U.S. economy has experienced in the past forty years.
The central bank’s rate-setting group known as the Federal Open Market Committee (FOMC) is widely expected to leave the short-term federal funds rate unchanged at a target range of 5.25% to 5.5% when it next convenes in September. As of August 10, interest rate traders assigned a 91% probability to the Fed hitting the pause button next month.
Now that the July CPI report is complete, we reached out to economists, strategists, investment officers, and other experts to gather their insights on how the inflation data will impact markets, macroeconomics, and monetary policy moving forward. Below, you’ll find a compilation of their comments, which have been slightly edited for conciseness and clarity.
Imagine having an expert dive deep into the latest CPI report and simplify it for you. Well, that’s exactly what this content aims to do! We’ve taken the original report and transformed it into easy-to-understand language. No jargon or complex terms here! We want to engage you, our reader, and make you feel like you’re having a conversation with a knowledgeable friend. So, let’s get started and explore the intriguing insights the CPI report has to offer. Are you ready to dive in? Let’s go!
“Inflation in the United States remains on a downward trajectory. Over the past three months, the core CPI has increased at a 3.1% annualized rate, the slowest pace since September 2021. For headline CPI, the 1.9% three month annualized change is the smallest gain since June 2020. The recent trend is encouraging and confirms that inflation is headed in the direction the FOMC wants. That said, we are cautious about getting overly excited about a sustained return to the Fed’s 2% inflation target. Deflation for goods such as used autos and services such as airfares and hotels will not last forever, and we think monthly core CPI gains will still be around 3% on an annualized basis in Q4. Our base case remains that the FOMC is done hiking, but rate cuts will not materialize until the spring of 2024.” – Sarah House, senior economist at Wells Fargo Economics
Although it’s important to note that two months of relatively low inflation rates cannot fully establish a long-term pattern, they do demonstrate positive advancements in the Federal Reserve’s endeavor to regain price stability. Unless there is a significant rise in the Consumer Price Index and a strong labor market report for August, these advancements are likely to persuade the Federal Open Market Committee (FOMC) to abstain from raising interest rates on September 20. In fact, we believe this trend of refraining from rate hikes will persist throughout the remainder of this unusually restrictive economic cycle. Such circumstances only enhance the possibility of a smooth and gentle economic slowdown, which is beneficial for all parties involved.
In general, the specific details provided in the inflation data for July align with the ongoing progress in slowing down inflation. While the inflation rate for core services increased during the month, other aspects such as rents, used car prices, clothing, and airfares showed a decline. The Federal Reserve has made it clear that their decision during the September meeting will depend on the overall data gathered between now and then. Based on the most recent CPI data, it supports our belief that July most likely marked the highest point in the Fed’s interest rate hikes. However, we will closely monitor the core PCE inflation and the balance of the labor market to determine if the trend of slowing inflation will continue in the long term.
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The latest update on inflation is a positive development for a market that has experienced some uncertainty lately due to profit taking and concerns about volatility during the summertime. Prices have shown a consistent upward trend, thanks in part to the rise in used-car prices and airline fares in July. This report provides some relief to the Federal Reserve, although there are still differing opinions within the Federal Open Market Committee. As we look ahead, investors will be closely following Jerome Powell’s speech at Jackson Hole to gain insight into what can be expected for the remainder of the year. David Russell, the Vice President of Market Intelligence at TradeStation, has shared this valuable update.
The decline in overall inflation in the United States seems to have reached its peak, but the erosion of core consumer price inflation is expected to continue in the upcoming months. This can be attributed to both the base effects and the gradual fading of price pressures caused by the pandemic. However, it is highly unlikely that core inflation will decrease enough to meet the central bank’s target of 2% without the occurrence of a recession. Recent economic data indicates that the Federal Reserve has not made a significant impact in that regard. While the prices of goods are expected to experience further disinflation in the coming months, the inflationary pressures in the housing market will ease considerably. Nonetheless, the inflation of core services, excluding housing, is influenced by wage levels, which tend to remain steady due to a historically tight labor market. The Federal Reserve has allowed itself sufficient flexibility to pause any rate adjustments as core inflation subsides, but the market’s expectation of rate cuts in 2024 may be challenging to justify, especially considering the economy’s ability to withstand previous rate hikes.
“Well, this was a great CPI number for our bullish bond call. The Fed hawks can chill. The only thing preventing inflation from showing an even more forceful deceleration is still the shelter segments. Another example of how demand is cooling off in the once hot market for ‘fun and games’ YOLO services spending. And what is this? Restaurants trimming their prices by -0.3%?? We haven’t seen this since October 2020 when all we were doing was ordering! The level of airfares is back to where it was in February 2022 — and this is the strongest segment of the economy!!” – David Rosenberg, founder and president of Rosenberg Research
The current prices in the market suggest that the Federal Reserve (Fed) has finished increasing interest rates, and the inflation figures should strengthen this belief. However, we find the market’s expectations of cuts beginning in early 2024 to be a bit too ambitious. The rise in energy and commodity prices, coupled with the recent data indicating that housing prices have likely reached their lowest point, may pose challenges to achieving further disinflation on a broader scale. We still have one more consumer price index (CPI) report before the next Fed meeting, and although the overall trend in the data is positive, more progress needs to be made before the Fed can confidently claim success. As the head of fixed income and a portfolio manager at Madison Investments, Mike Sanders highlights the need to exercise caution and ensure continued improvement in the data.
The overall results of the July Consumer Price Index (CPI) report were surprisingly positive. However, the costs of shelter continued to remain high and show no signs of decreasing. Additionally, energy prices are expected to exert inflationary pressure in the future. Therefore, despite this positive inflation reading, our perspective remains unchanged – we anticipate that the Federal Reserve will raise the federal funds rate at least once before the year concludes. To alter this outlook, a significant divergence between headline inflation and core inflation is required. This would necessitate a substantial slowdown in shelter costs, which we have been anticipating for numerous months but has not yet materialized.
“The one ongoing concern for the Fed is shelter costs, which contributed to virtually all of the increase in July CPI. Given the slowdown in rents, we expect that the increase in shelter will decline over time, which could help push core inflation below 4% by year-end. With an off month in August, this morning’s report marks the first of many data points that the Fed will be watching between now and the next policy announcement on September 20. There is good reason to believe the full impact of higher interest rates have yet to flow through the economy, and in our view, it would take a sharp reversal in the current disinflationary trends for the Fed to move forward with any further rate increases.” – Ivan Gruhl, co-chief investment officer at Avantax
The decline in inflation during the summer remains ongoing. The main factor behind this is the decrease in prices for services, particularly in rental costs, which are expected to continue decreasing due to the cooling off in the housing market. On the other hand, the rise in prices for goods has already slowed down, while service inflation is only just starting to respond to the tightening of monetary policy. This is not surprising, given that service prices are usually more resistant to changes in interest rates. The Federal Reserve’s monetary policy will continue to slow down spending and reduce inflation in the coming year, contributing to the overall positive trend. Monetary policy officials have made it clear that they will maintain high interest rates until inflation reaches 2%. The only uncertainty is the length of time it will take to reach this goal.
Wondering when the next meeting of the Federal Reserve (Fed) will take place? Well, let me give you the lowdown on this topic. The Fed, being responsible for the monetary policy of the United States, holds regular meetings throughout the year to discuss and make decisions that impact the economy. These meetings are crucial as they influence interest rates, inflation, and other important aspects of the financial system. So, if you’re curious about when the next Fed meeting is scheduled, keep reading to stay in the know!
The recent decline in core inflation, primarily due to lower housing and car prices, suggests that higher interest rates are starting to impact spending behavior. Although the inflation snapshot from July is only the first of two before the FOMC reconvenes in September, it aligns with the market’s expectation of a pause in the tightening cycle. With limited time for the Federal Reserve to harmonize monetary policy with a broader economic slowdown, it is crucial to monitor August’s numbers for further confirmation of progress made in controlling inflation. As an economist at the National Association of Federally-Insured Credit Unions (NAFCU), Noah Yosif emphasizes the significance of these upcoming figures in assessing the inflation situation.
“We do not think the Fed will be concerned with the slight uptick in the year-over-year headline number this month, as it was driven by a particularly weak inflation print dropping off from July 2022. We expect next month’s headline number might tick up as a result of the recent rise in gas prices, but the Fed and investors should keep their focus on the core inflation measures. Despite core inflation coming down from its highest levels, it is still well above the Fed’s 2% target. Assuming the economic data evolves as we expect over the next few months, we believe we have seen the last hike for this cycle. – Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors
“Today’s inflation report was reminiscent of the good old days. With both headline and core inflation rising 0.2% month-over-month, one could surmise that the post-pandemic inflationary impulse has faded. Said another way, in 2019, the average monthly increase in inflation was 0.2%, and that’s what we’ve experienced in the past two months in 2023. The Fed, therefore, might feel as if they’ve ‘stuck the landing’ and can pause as planned and not raise interest rates in September. That said, in our view, the economy continues to be carrying decent momentum, and as was reported last week, wage growth is still robust. So, while a pause is probable, a near-term pivot is not.” – George Mateyo, chief investment officer at Key Private Bank
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The latest Consumer Price Index (CPI) data confirms what many have anticipated – a gradual easing of the previously soaring inflation levels that plagued the economy for the past few years. Today’s report not only brings a glimmer of hope but also showcases a clear downward trend in inflationary indicators over the past three and six months. However, we should bear in mind that the comparison to last year is critical, as prices experienced an unexpected surge during that time, reaching unprecedented heights. This explains the need to adjust our measurements to account for the unusually high price increases observed a year ago, which were well above the norm we had grown accustomed to for decades. Reflecting on the events of late summer in 2022, we vividly recall the surprise of witnessing prices skyrocketing after a period of apparent stabilization in the spring and early summer. Thus, it’s crucial to acknowledge that the current more controlled rates of change also reflect a previous period of rapidly escalating prices.
As we navigate the intricacies of the financial landscape, there are key events that demand our attention. Currently, the futures market is buzzing with excitement over the Consumer Price Index (CPI). However, before we can fully revel in this celebratory atmosphere, we must first delve into the matters awaiting us at Jackson Hole. In order to realign investor perspectives, Chair Jerome Powell holds the power to accomplish this feat, just as he did in August of the previous year. During that time, he adamantly advocated for the concept of “higher for longer” to achieve the Federal Reserve’s inflation target of 2%. The consequential effect of his actions resulted in a downturn for stocks. Despite these short-term fluctuations, our outlook remains optimistic over the long haul. We stand firm in our belief and are inclined to purchase on brief moments of decline.
“The soft landing narrative continued to build following the latest data on consumer prices. This was the second consecutive month in a row where both the headline and core inflation posted monthly increases of only 0.2%. A building trend of disinflation will certainly be welcomed by the Fed as they prepare for a policy decision at the September meeting. Within the data, shelter costs continued to be a driving factor for inflation, while price declines were seen in the goods sector and in particular used vehicles. Overall, the case continues to build for the Fed to be done with the hiking cycle as real yields are well into positive territory and progress on bringing down inflation is evident.” – Charlie Ripley, senior investment strategist at Allianz Investment Management
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