A quirk in year-over-year comparisons caused headline inflation to accelerate for the first time in more than a year in July, but the underlying data once again showed that the pace of rising prices continues to ease, the Consumer Price Index (CPI) revealed Wednesday.
The July inflation reading, which was largely in line with expectations, bolsters the case for the Federal Reserve to leave interest rates unchanged at the next Fed meeting, experts say.
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.
Although inflation remains above the central bank's 2% target, the July CPI data add to a mounting pile of evidence that the Fed is making progress in its fight against the worst bout of inflation to hit the U.S. economy in four decades.
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.
With the July CPI report now in the books, we turned to economists, strategists, investment officers and other experts to get their takes on what the inflation data means for markets, macroeconomics and monetary policy going forward. Below please find a selection of their commentary, sometimes edited for brevity or clarity.
Expert takes on the CPI report
"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
"While two months of subdued core (and supercore) inflation numbers might not define a trend, they do indicate progress in the Fed's fight to restore price stability. Barring a hot August CPI and labor market report, the progress should encourage the FOMC to skip a rate hike on September 20 and, in our view, for the remainder of this exceptional tightening cycle. That can only increase the prospect for a soft landing." – Sal Guatieri, senior economist at BMO Capital Markets
"Overall, the underlying details of the July CPI inflation data are consistent with ongoing progress on disinflation. Although core services inflation trended higher on the month, other component-level trends are evolving in line with our expectations. In particular, rents and used car prices softened, alongside clothing and airfares. The Fed has emphasized that its September meeting decision will hinge on the totality of data accumulated between now and then. The latest CPI data reinforces our view that July likely marked the peak in the Fed's hiking cycle, however, we will be closely monitoring the evolution of core PCE inflation and labor market rebalancing to determine whether the disinflation trend is durable." – Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management
"Today's inflation report is good news for a market that's seen profit taking and worries about summer volatility. Prices continue their steady improvement, with used-car prices and airline fares helping drive the improvement in July. This report takes pressure off the Fed but there's still some division between hawks and doves at the FOMC. Investors will now watch Jerome Powell's speech at Jackson Hole to steer expectations into year end." – David Russell, vice president of market intelligence at TradeStation
"The bulk of the decline in U.S. headline inflation is over, but core consumer price inflation should continue to erode in the coming months due to base effects and the unwinding of pandemic related price pressures. However, there is almost no chance that core inflation will fall back near the central bank's 2% target absent a recession, and the latest economic data indicates the Fed did not provide that knock-out blow. Goods prices should experience some further disinflation in the months ahead and shelter inflation will ease significantly. However, core services ex-shelter inflation is driven by wages, which remain sticky given that the labor market remains historically tight. The Fed has provided itself with ample flexibility to go on hold while core inflation eases, but the rate cuts priced for 2024 will be hard to justify given that the economy has shrugged off past rate hikes." – Phillip Colmar, managing partner and global strategist at MRB Partners
"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
"Current market pricing is assuming Fed is done with hikes and these inflation numbers should reinforce that narrative. However, the market expectations of cuts starting in early 2024 is a little aggressive in our view. Higher energy and commodity prices – along with current data showing housing prices having probably troughed – could make additional disinflation on an aggregate basis difficult. There is one more CPI report before the next Fed next meeting and while the overall trend in the data is good, still more progress must be made before the Fed can declare victory." – Mike Sanders, head of fixed income and portfolio manager at Madison Investments
"The July CPI report was better than expected, overall. However, shelter costs remained strong and showed no signs of easing while energy prices are slated to put pressure on headline inflation going forward. Thus, this better inflation reading does not change our view that the Federal Reserve is going to increase the federal funds rate at least once more before the end of this year. In order for this to change, there would need to be a strong decoupling between headline inflation and core inflation but for that, we need a big slowdown in shelter costs, which we have been expecting for several months and has still failed to show up." – Eugenio Alemán, chief economist at Raymond James
"Investors shouldn't overreact to the rising headline CPI reading, which was driven by recent energy price increases off a very low base. While these effects will impact August CPI as well, energy price increases should stabilize as the global economy continues to slow. Looking at the less volatile core CPI reading, shelter cost growth of 0.4% for the month and 7.7% over the last year was responsible for almost all of the growth in core CPI. What the economy needs is a consistent inflation picture where monthly core CPI growth in the 0.2% range places us firmly in the 2% to 3% annualized inflation range. This will allow businesses to more responsibly plan and invest in employees and equipment without having to get into bidding wars for talent and pay up for scarce resources. Moving forward, we see a continued moderation in shelter costs, used car prices, and slower non-housing services inflation as labor demand moderates. We'll be watching for any signs that July's modest uptick in wage inflation doesn't become a trend." – Marc Balcer, director of investment strategy at Girard, a division of Univest Wealth
"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 summer of disinflation continues. Inflation is largely being driven by services, especially rental costs, which are likely to head down given the cooling in housing. Goods inflation is already down, and service inflation is only beginning to respond to the tightening of monetary policy. This is not surprising since service prices typically tend to be more sticky and less responsive to interest rate hikes. Federal Reserve policy should continue to slow down spending and inflation over the next year and keep inflation moving in the right direction. Monetary policy officials have been very clear that they will not ease up on the high interest rates until they can see the whites of the eyes of 2% inflation. The only question is how long it will take." – David Beckworth, economist and senior research fellow at the Mercatus Center
"A slow but steady cooldown in core inflation driven by lower shelter and auto prices suggests that interest-sensitive spending has begun to feel the weight of rising interest rates. July's print, while the first of two snapshots on inflation before the FOMC reconvenes in September, reinforces the market view of a pause in the tightening cycle. Given a shrinking window of time for the Federal Reserve to synchronize monetary policy with a broader slowdown in economic activity, NAFCU expects August's numbers will be even more vital to providing additional confirmation of progress achieved on inflation." – Noah Yosif, economist at the National Association of Federally-Insured Credit Unions
"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
"As expected, today's CPI data depicted continued softening in the elevated inflation levels we have witnessed over the past couple of years. It's not just encouraging that today's report was softer, but also that the 3- and 6-month trends of these inflationary indicators are decisively lower. Still, we must also recognize that prices a year ago experienced surprisingly high jumps and thus our measurement of rate of change has to reflect that year ago price gains resided at aggressively elevated levels, well above what we had been used to for decades. Hence, we remember the late summer of 2022 like it was yesterday, in terms of surprise at how much prices had jumped after it looked like they were beginning to cool off during the spring and early summer. Indeed, one has to respect the fact that today’s more contained rates of change also reflect prices that had been gaining at alarming rates prior to this." – Rick Rieder, BlackRock chief investment officer of Global Fixed Income and head of the BlackRock Global Allocation Investment Team
"The futures market is celebrating CPI but we have to get through Jackson Hole. If the Fed wants to reorient investors, Chair Jerome Powell will do it there as he did last August when he pounded the table on higher for longer to get to the Fed's 2% inflation target, and he sent stocks reeling. We're bullish long term and would be a buyer on dips." – Gina Bolvin, president of Bolvin Wealth Management Group
"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
