By Andrew Moran
The U.S. annual inflation rate rose to a lower-than-expected 3.2 percent in July, marking the first increase in a year according to the Bureau of Labor Statistics. This was up from 3 percent in June.
The consumer price index (CPI) edged up 0.2 percent month-over-month.
Core inflation, which eliminates the volatile food and energy sectors, eased to 4.7 percent, down from 4.8 percent. This also came in shorter than the consensus estimate of 4.8 percent. The core CPI inched 0.2 percent higher month-over-month.
Nearly all CPI indexes turned higher from June to July, including food (0.2 percent), energy (0.1 percent), shelter (0.4 percent), and transportation services (0.3 percent).
Many market analysts had anticipated that oil and gas would be the primary drivers of a higher CPI print. Crude prices have been soaring since the end of June, resulting in higher gasoline costs. Gasoline rose 0.2 percent, down from 1 percent in June. Fuel oil surged 3 percent, up from negative 0.4 percent. Natural gas services also went up, climbing 2 percent.
Supermarket prices jumped 0.3 percent, with various kitchen staples climbing last month.
One of the most notable increases was beef. The beef and veal category surged 2.4 percent, including a 1.5 percent boost for ground beef, a 6.5 percent spike for beef roasts, and a 2.3 percent rise in beef steaks.
Agricultural experts have been warning for the past year that the price of beef for consumers would skyrocket due to falling inventories and tepid output amid high input costs.
Oranges advanced 1.6 percent as the classical breakfast staple has seen production plummet due to a citrus greening disease that has devastated Florida crops. While Brazil has turned into one of the world’s leading orange producers, the South American market is beginning to see the disease in key growing areas.
Meanwhile, other foods that have seen significant month-over-month increases were bread (0.6 percent), apples (2.4 percent), coffee (1 percent), and butter (1 percent).
Shelter continues to remain elevated, with the index rising 0.4 percent. The rent portion of shelter also increased by 0.4 percent and is up 7.8 percent from the same time a year ago.
The Federal Reserve Bank of Cleveland’s Inflation Nowcasting model suggests that the annual inflation rate will climb to 4.1 percent in August. The regional central bank estimates the CPI will surge 0.8 percent on a month-over-month basis.
Producer prices will be the next major inflation metric. The consensus estimate for the producer price index (PPI) suggests it will rise by 0.7 percent year-over-year and 0.2 percent month-over-month.
The financial markets responded well to the softer inflation print in pre-market trading, with the leading benchmark indexes recording gains.
U.S. Treasury yields were mostly red across the board, as the benchmark 10-year yield shed nearly 3 basis points to below 3.98 percent. The 2-year yield was flat at 5.41 percent.
The U.S. Dollar Index (DXY), a gauge of the buck against a basket of currencies, plunged to around 102.00. While the index has risen more than 2 percent in the last month, the DXY is down about 1.4 percent year-to-date.
High Inflation Still Harming Consumers
Despite the rate of inflation growth slowing from the 9.1 percent peak in June 2022, consumers are still feeling the effects of price pressures.
A July Bankrate survey found that 72 percent of Americans do not feel financially secure, and 63 percent cite high inflation as preventing them from being financially comfortable.
A separate Bankrate poll in June learned that 68 percent are saving less for emergencies due to inflation.
Even as households struggle with the high cost of living, consumer sentiment has improved. The July University of Michigan Consumer Sentiment Index rose to 72.6, up from 64.4 in June and higher than the market estimate of 65.5. One- and five-year inflation expectations also edged up to 3.4 percent and 3.1 percent, respectively.
Should this weigh on consumption trends, the U.S. economy could take a hit, warns James Knightley, the chief international economist at ING.
“If consumer borrowing does turn negative and households exhaust their excess savings we will need to see rising real incomes to keep consumer spending positive,” Mr. Knightley wrote in a note. “While this is possible, it highlights again that the risks for economic activity, particularly for the household sector, remain to the downside.”
Federal Reserve and Interest Rates
In addition to the July CPI report, the Federal Reserve has several other crucial pieces of data to assess before making a policy decision at the September Federal Open Market Committee (FOMC) meeting.
“The Federal Reserve will be watching two full cycles of economic reports between now and their September meeting, with employment and inflation data being the most prominent,” explained Greg McBride, the chief financial analyst at Bankrate. “Following Friday’s monthly employment report, the July CPI release will complete round one of the most significant economic updates and further shape initial expectations about whether the Fed is done raising rates or slated to continue.”
Now that the Fed has lifted the benchmark fed funds rate to a target range of 5.25 percent and 5.5 percent, the highest level in two decades, opinions among central bank officials are mixed.
Philadelphia Fed President Patrick Harker stated on Aug. 7 that the Fed could continue to wait before pulling the trigger on another rate hike.
“Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Mr. Harker told a breakfast sponsored by the Philadelphia Business Journal. “Should we be at that point where we can hold steady, we will need to be there for a while.”
Speaking in an interview with The New York Times on Aug. 7, New York Fed President John Williams asserted that rates are restrictive enough and can apply pressure to inflation. But whether rates need to go higher or stay put will depend on the data, he noted.
“From my perspective, monetary policy is in a good place. We’ve got policy where we need to be,” Mr. Williams told the newspaper. “Because we have monetary policy, in my view, in a restrictive stance and definitely influencing the economy in the right direction, I don’t feel we need to take immediate action or specific action.”
Fed Gov. Michelle Bowman made the case before a meeting at the Kansas Bankers Association that more rate hikes will be necessary to ensure inflation returns to the institution’s 2 percent target.
“The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2 percent goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level,” Ms. Bowman said.
For Giuseppe Sette, the president of AI financial market research firm Toggle AI, the latest CPI report “is one more nail in the coffin for the September rate hike.”
“Federal Funds rates are already at a level commensurate with the current level of inflation. You can certainly expect the Fed to keep rates here. But the hiking cycle? That’s over,” he said in a note.
Peter Schiff, the chief economist and global strategist at Euro Pacific Asset Management, thinks “the headline number is about to rise sharply led by higher surging oil prices.
“The Fed has already lost,” he posted on X, formerly known as Twitter.
At the recent post-FOMC meeting press conference, Fed Chair Jerome Powell reiterated that it would take until 2025 to bring inflation back down to its 2 percent objective.
According to the CME FedWatch Tool, the futures market is pricing in a rate pause next month. Despite the Fed penciling in another rate hike this year, most investors think the central bank will leave rates unchanged for the remainder of 2023.