Inflation Lower than Predicted in July CPI Report

Inflation Lower than Predicted in July CPI Report

cpi report

Inflation appears to have taken a backseat in the U.S. economy, according to new figures released by the Bureau of Labor Statistics Thursday. The Consumer Price Index rose 3.2% compared to the same time last year, as prices increased 0.2% seasonally adjusted for the month of July. Though this is slightly lower than expected, it marks the first increase in inflation on an annual basis since April 2021, giving markets a reason to celebrate.

Core Consumer Price Index – excluding food and energy – was also up 0.2% month-over-month, and 4.7% for the year, both slightly lower than estimates. Markets reacted positively to the news, with futures tied to the Dow Jones Industrial Average up more than 200 points and Treasury yields mostly lower.

Inflation has dropped significantly in recent months, with shelter costs playing a major role in the decrease, according to Sung Won Sohn, chief economist at SS Economics and professor of economics and finance at Loyola Marymount University. The Bureau of Labor Statistics showed that 91% of the month-on-month inflation was from the shelter category, which makes up a third of the consumer price index (CPI).

Food prices only rose 0.2%, and despite rising crude oil prices and higher pump prices, energy only saw a 0.1% increase. Used vehicle prices even dropped 1.3% while medical care services decreased by 0.4%. Meanwhile, airline fares dropped 8.1% from July, and nearly 19% from this time last year, as professionals continue to be hit by the ongoing Coronavirus pandemic.

Sohn has suggested that the Federal Reserve will soon stop raising interest rates as a result of these improvements in the inflation picture.

Prices remain relatively high in sectors such as housing and used cars, however a recent uptick in inflation has led to promising gains for consumers and Federal Reserve policymakers, according to Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

The modest inflation rate resulted in increased wages for workers too; the Bureau of Labor Statistics reported that real wages increased by 0.3% month-on-month and were up 1.1% year-on-year. While headline inflation was lower than predicted, it still showed a 0.7% increase from the 3% reading in June.

Ultimately, the data reveals that although inflation figures have eased off their 40-year highs of mid-2022, they are still above the 2% target desired by the Federal Reserve, meaning that any potential interest rate reductions are unlikely for now.

Despite recent decreases in inflation, analysts suggest the Federal Reserve is unlikely to cut interest rates soon. Seema Shah, Chief Global Strategist with Principal Asset Management, stated that continued pain from economic forces will be necessary before inflation reaches its two percent target goal.

The 11 interest rate hikes put into play by the Federal Reserve have created a need for a break in September. However, dissenting views between Fed governors on whether or not more increases will be called for have caused confusion in the markets.

Federal Reserve Governors John Williams of New York and Patrick Harker of Philadelphia spoke in favor of ceasing additional hikes while Governors Michelle Bowman and Christopher Waller allegedly leaned towards further increases in interest rates. It remains to be seen which opinion holds sway and what actions, if any, the Federal Reserve takes in the months to come.

Despite the Federal Reserve raising interest rates this year, economic growth remains strong and resilient. In the first half of 2023, GDP has grown by 2% and 2.4% in the first two quarters, respectively, with the Atlanta Fed tracking third-quarter growth of 4.1%. Payroll gains have slowed, but remain solid and unemployment is at its lowest in decades.

Consumers are feeling stretched financially and have increasingly turned to credit cards and savings for their spending needs. New York Fed data shows that total credit card debt has surpassed a trillion dollars for the first time this year.

Yet, there is now renewed optimism from several economists that America can avoid a recession, despite the uphill battle with aggressive rate hikes. Bank of America, Goldman Sachs and JPMorgan Chase have all recently revised their forecasts with a recession seeming less and less likely.

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