On Thursday, following the release of U.S. CPI data, Wall Street Journal reporter Nick Timiraos, among others, suggested that the July increase in the U.S. Consumer Price Index (CPI) indicates mild price pressure, potentially discouraging the Federal Reserve from hiking interest rates in September.
The U.S. Bureau of Labor Statistics unveiled the latest figures, showing that the July year-over-year CPI growth rate accelerated from 3% in June to 3.2% - the first uptick since June 2022. Though this is below the anticipated 3.3%, when excluding the more volatile sectors of food and energy, core CPI for July rose by 4.7%, matching expectations and sitting below the previous rate of 4.8%. Month-on-month, both July's CPI and core CPI increased by 0.2%, consistent with projections, marking the smallest consecutive growth in over two years.
Timiraos provided several insights into the CPI report:
- Monthly data portrays an encouraging price trend, suggesting inflation isn't picking up.
- Fed officials often focus on core inflation, considering it a more predictive measure than overall inflation. The recent data has brought the three-month annualized rate of core inflation to its lowest in two years, at 3.1%. This progression might convince the Fed to keep rates stable in their September policy meeting.
- Economists widely believe that the year-over-year CPI increase reflects the events of June and July 2022 - a phenomenon referred to as the "base effect." The annual inflation rate for this year might not slow significantly and could even pick up by early 2024.
Timiraos also analyzed significant segments within the CPI report:
- July saw housing prices increase by 0.4% month-on-month, consistent with June.
- Used car prices in July decreased by 1.3%, significantly slowing from the substantial rebounds early in the COVID-19 pandemic. This trend is expected to continue, likely exerting downward pressure on core inflation.
- While energy prices slightly increased by 0.1% in July, they might push inflation upwards in the coming months. The average price for a gallon of regular unleaded gasoline in the U.S. climbed from approximately $3.54 at the beginning of July to $3.76 by month-end. Given that the CPI is based on monthly averages, recent gas price hikes could heavily influence August's CPI.
The Federal Reserve raised interest rates by 25 basis points during their July meeting, elevating the federal funds rate target range to between 5.25% and 5.5% - the highest since 2001, aiming to curb inflation by cooling the economy. Even though there are signs suggesting easing price pressures, the U.S. economy hasn't significantly slowed. From a bond market perspective, a critical U.S. inflation expectation index approached a nine-year high this week, implying to many investors a potential persistence in U.S. inflation and the challenge of pulling it back to the 2% target.
Quoting Federal Reserve Chairman Jerome Powell, Timiraos mentioned the Fed's search for further softness in the job market, including decelerating wage growth.
After the significant U.S. non-farm payroll report was released last Friday, Timiraos wrote that U.S. employers scaled back hiring this summer, further suggesting an economic cooldown, thus relieving pressure on the Fed to raise rates in September. However, he also noted a discrepancy between the rate of wage growth and the low, steady inflation levels anticipated by economists.
