The release of the consumer-price report for the month of July has provided some insight into the state of U.S. inflation. Contrary to expectations, the data indicates that inflation can continue to decrease without causing a recession or a significant increase in unemployment. As a result, it is becoming more likely that the Federal Reserve will refrain from taking any action in September.
Despite these findings, it is important for investors to approach the report with caution. The report revealed a slight decrease in underlying core inflation from 4.8% to 4.7% over the past year. While this has been viewed positively by stock investors, as it supports the notion of continued disinflation in the U.S., it is important to not solely rely on this data.
The positive reception from stock investors was evident as the Dow industrials (DJIA) experienced an increase of up to 455 points earlier in the day. Additionally, traders in fed funds futures now predict a 90.5% chance that rates will remain between 5.25%-5.5% next month.
However, macro strategist Will Compernolle of FHN Financial highlights three reasons why his firm remains cautious about interpreting the July CPI as a definitive sign of the end of worrisome inflation.
As always, it is crucial for investors to exercise diligence and scrutiny when analyzing market data, especially when it comes to indicators such as inflation.
Inflation Update: A Closer Look at Recent Data
The latest data on inflation in the United States reveals that the core Consumer Price Index (CPI), which excludes food and energy prices, continues to exceed the Federal Reserve’s target. With a year-on-year increase of 4.7%, this figure is more than double the desired rate of 2%.
Contributing to this upward trend are rising energy prices that have been observed since late July. As we enter the next month, it is expected that these prices will further drive up the headline inflation rate. Additionally, there is a concern regarding the pass-through effect on energy-intensive sectors like manufacturing and transportation services.
Another significant indicator of core inflation is the personal-consumption expenditures price index. This alternative reading also surpasses the Fed’s target of 2% based on the latest release in late July. It is essential to note that the Fed primarily focuses on the PCE inflation rather than CPI, as there are notable methodological differences between the two approaches. These differences have been particularly evident this year, impacting components such as airfares and medical care services.
Overall, the July CPI report has been deemed as highly encouraging in terms of inflation. This optimism has further strengthened expectations that the Fed has reached its “terminal rate,” marking a potential soft landing. While there are potential risks of increased inflation in the coming months, positive signs of supply chain normalization and better balance among pandemic-induced inflation factors offer some reassurance.
Monthly Core CPI Rate Holds Steady at 0.2%
According to a macro strategist, the core Consumer Price Index (CPI) rate remained at 0.2% for the second consecutive month, marking the “best back-to-back monthly inflation readings since early 2021.” This data suggests that previous downticks in monthly core inflation have been followed by reacceleration.
Market Response
Following the release of this report, all three major U.S. stock indexes (S&P 500, Nasdaq Composite, and Dow Jones Industrial Average) experienced gains. Treasury yields displayed mixed results, while the ICE U.S. Dollar Index slightly declined by 0.2% as of Thursday morning.
