In a surprising twist, U.S. consumer prices didn’t rise as much as everyone thought they would in July, giving the Federal Reserve more room to possibly cut interest rates when they meet in September. This has Wall Street buzzing.
The Labor Department dropped the latest consumer price index (CPI) numbers, revealing a 2.9% annual increase for July. That’s a slight dip from June’s 3.0%, and notably lower than the 3.0% that many economists had penciled in. Month-over-month, inflation ticked up by 0.2%, recovering from a slight 0.1% dip in June, right in line with expectations.
But it’s not all smooth sailing. The details of the report left some analysts scratching their heads. Rent surged by 0.5% month-over-month, and the Owners’ Equivalent Rent (OER) nudged up by 0.4%, both higher than anticipated. This was unexpected after the modest gains we saw in June. Capital Economics pointed out that they hoped these weaker gains would set the trend, but July’s numbers put that hope to bed.
The “core” inflation rate—which strips out the notoriously volatile food and energy sectors—rose 3.2% over the year to July, slightly below the 3.3% forecast. On a monthly basis, core inflation edged up 0.2%, following a 0.1% rise in June.
Wells Fargo analysts noted that core goods prices fell more than expected, driven by a sharp 2.3% drop in used vehicle prices. However, core services inflation ran hotter, led by jumps in housing, recreation, and communication services. The bank’s analysts suggested that the disinflationary trend, which had faltered earlier this year, is back on track. But even though July’s report was somewhat encouraging, it doesn’t scream “crisis,” meaning the Fed might just go for a moderate 25 basis point rate cut in September, rather than something more drastic.
This inflation report followed on the heels of Tuesday’s surprisingly low July producer price index (PPI), reinforcing the idea that inflationary pressures aren’t as scary as they once were. That gives the Fed some leeway to potentially bring down its policy rate from the current 5.25%-5.50% range—a range that’s been in place for over a year now.
Over on Wall Street, reactions were mixed. The Dow Jones Industrial Average eked out a 0.2% gain, but the S&P 500 and the NASDAQ Composite both dipped slightly, perhaps reflecting uncertainty about what this all means for the economy.
JPMorgan analysts seemed to think that today’s inflation numbers were already baked into yesterday’s PPI reaction. But with disinflation seemingly back on track, the upcoming retail sales report could be the next big thing to either calm or fan the flames of growth concerns.
On the labor front, July’s payroll report showed job growth slowing more than expected, setting off alarm bells about a weakening job market. That’s got people worried about a potential recession, and it’s adding pressure on the Fed to act.
Wells Fargo’s analysts remain on the fence, noting that today’s data hasn’t settled the debate over whether the Fed will go for a 25 or 50 basis point cut in September. They expect the Fed will aim for a more neutral policy stance soon, given the steady decline in inflation alongside rising unemployment. As it stands, they’re betting on a 50 basis point cut, though they concede that the decision could hinge on the August employment report and CPI data, both set to drop just days before the September FOMC meeting.
And let’s not forget, Fed Chair Jerome Powell’s upcoming speech at the Jackson Hole conference on August 23 looms large as a potential game-changer. All eyes will be on him as the Fed navigates its dual mandate of fostering maximum employment while keeping inflation in check. Buckle up, because the road ahead looks anything but smooth.
