CPI expects inflation to pick up in July. Why the Federal Reserve Doesn’t Care

The Consumer Price Index, due out from the Labor Department early Thursday, should show a modest monthly gain in July, though the annual CPI inflation rate was higher. Core CPI prices are also expected to remain relatively modest, with annual increases stubbornly high. But the inflation figures are not expected to change the Federal Reserve’s policy.


The S&P 500 CPI retreated ahead of the inflation report, but is still near a 52-week high.

CPI inflation projections

Economists expect July’s CPI to rise 0.2% from the previous month, after a similar gain in June. Core CPI excluding food and energy should rise 0.2% vs. June.

However, the annual CPI inflation rate is expected to rise to 3.3% from 3% in June. This reflects flat prices in July 2022. Core inflation stands at 4.8%.

Average hourly wages rose a solid 4.4% in June from a year ago. But a recent IBD/TIPP poll found that 16% of adults say their pay is keeping pace with inflation, the lowest since at least February 2022. About 58% say they don’t keep it. It was 20%-55% in July.

Some of that increased sentiment falling back reflects a rebound in gasoline prices. Prices at the pump are still lower than a year ago, but have risen significantly in the past few weeks.

Central Bank Policy Impact

Other than a surprisingly strong CPI inflation report, central bank policy impact is likely to be minimal.

First, policymakers are aware that the higher July CPI inflation rate will largely reflect tougher year-ago comparisons and not re-accelerate price pressures on a broader scale.

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Second, central bank officials have taken a wait-and-see approach, signaling that they are nearing the end of rate hikes.

After a pause in June, policymakers raised rates by a quarter-point at the July 25-26 Fed meeting. Federal Reserve Chairman Jerome Powell said the September meeting would be “direct,” meaning a rate hike is likely, but he gave hints the Fed would take no action, noting inflationary growth risks were “balanced.”

Since then, policymakers have given some mixed signals after the July Fed meeting, but have generally shown patience.

Philly Fed President Patrick Harker, a voting member this year, said Tuesday, “I believe we may be at a point where we can be patient, keep rates steady and allow the monetary policy actions we’ve taken to do their job.”

Markets see a 13% chance of another rate hike at the September 20 meeting, rising above 30% by the November 1 meeting. Opportunities have been limited in the past week.

By that Nov. 1 meeting, central bank officials will have a first reading of CPI inflation and jobs reports and third-quarter GDP growth through September.

Investor sentiment weakened as the economic confidence index fell to a one-year low

S&P 500 reaction to CBI report

The S&P 500 has rallied 16.4% for the year through Wednesday despite the recent pullback.

The 10-year Treasury fell to 4.01% on Wednesday ahead of the CBI inflation report. The benchmark yield hit an intraday high of 4.21% on August 4, 2023 before pulling back sharply. But higher 10-year yields reflect a surge in Treasury issuance and stronger economic growth. Short-term Treasury yields, which are more closely tied to central bank policy, have fallen or held steady over the past few weeks.

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On Friday, the Labor Department will release the July producer price index. Economists expect PPI and core PPI to show a 0.2% monthly gain. The PPI inflation rate should rise from 0.1% to 0.7%, while the core PPI inflation rate falls from 2.4% to 2.3%.

Read the big picture every day to stay in tune with market direction and leading stocks and sectors.

Follow Ed Carson on Twitter @IBD_ECarson For stock market updates and more.

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