The latest inflation report from the Bureau of Labor Statistics, released on Wednesday morning, revealed that consumer price increases for the month of July were in line with expectations. The Consumer Price Index (CPI) saw a 0.2% rise over the previous month, a slight uptick from June’s 0.1% decline, which was largely driven by an increase in energy prices. This monthly increase was anticipated by economists, indicating that inflation trends are stabilizing, though still closely monitored by both investors and the Federal Reserve.
Year-over-year, the CPI increased by 2.9% in July. This marked a slight deceleration compared to the 3% annual gain recorded in June and slightly outpaced economist predictions, which had also forecasted a 3% rise. Notably, this was the lowest annual CPI increase since the spring of 2021, signaling that the inflationary pressures that have gripped the economy over the past two years might be easing, albeit gradually.
When focusing on the “core” CPI, which excludes the more volatile components of food and energy, prices in July also rose by 0.2% from the previous month. On an annual basis, core prices increased by 3.2%, again matching economist expectations. This was a modest decline from June’s figures, which showed a 0.1% monthly increase and a 3.3% annual rise in core prices. The stability in core inflation is particularly significant, as it reflects underlying inflation trends without the noise of energy and food price fluctuations.
12-month percent change in CPI for All Urban Consumers (CPI-U), not seasonally adjusted, July 2023 – July 2024
Source: Bureau of Labor Statistics
Inflation, despite these recent moderations, continues to run above the Federal Reserve’s target of 2% on an annual basis. However, the consistent deceleration in price increases, combined with other economic data, is fueling a narrative that the Federal Reserve may soon need to cut interest rates to support economic growth. The July jobs report, which spurred a sell-off in the markets, is a key piece of this narrative. It has led many market participants to believe that the central bank could take a more accommodative stance sooner than previously anticipated.
The Fed’s preferred measure of inflation, the core Personal Consumption Expenditures (PCE) price index, also showed signs of slowing. In June, the core PCE index remained unchanged from the previous month, marking the slowest annual increase in more than three years. This suggests that while inflation is still present, its intensity is waning, which could provide the Federal Reserve with the justification it needs to begin lowering rates.
Following the release of Wednesday’s CPI data, market expectations for a rate cut by the Federal Reserve at its September meeting surged. According to the CME FedWatch Tool, there was nearly a 100% probability of a rate cut by the end of September. However, there is now a split between the likelihood of a 50 basis point cut and a 25 basis point cut, with odds roughly even. This marks a shift from the previous week, when traders had estimated a 70/30 chance in favor of a 50 basis point cut.
Nathan Sheets, the global chief economist for Citi, echoed this sentiment in an interview with Yahoo Finance’s The Morning Brief. Sheets suggested that the July inflation report provides a “green light” for the Federal Reserve to consider a rate cut in September. However, he acknowledged that the decision between a 25 basis point and a 50 basis point reduction remains finely balanced. Sheets also pointed out that the upcoming retail sales report for July, scheduled for release on Thursday, would be another critical factor for the Fed to consider. The retail sales data will provide further insight into consumer spending behavior, which is a crucial driver of economic activity and inflation.
In summary, while the latest inflation data aligns with expectations and shows signs of moderation, the Federal Reserve’s path forward remains uncertain. The central bank faces the challenge of balancing the need to control inflation with the risk of stifling economic growth. The coming weeks, particularly with the release of additional economic data, will be crucial in determining whether the Fed opts for a more aggressive or cautious approach to interest rate cuts. Investors and economists alike will be watching closely as the Fed navigates this delicate balancing act.
