Inflation is expected to have remained relatively stable in July, as a modest increase in the cost of services offset a slower rise in the price of goods. While this suggests a cooling economy, it also highlights the challenge of fully achieving the Federal Reserve’s inflation target, as only the most persistent areas of price growth remain.
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Annual Pace: Economists predict that the consumer price index (CPI) rose at a 3.3% annual pace in July, according to consensus expectations from FactSet. This would be a slight increase from the 3% pace observed in June, representing the first month-over-month rise in headline inflation in over a year.
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Month-over-Month: On a month-over-month basis, economists expect headline inflation to have risen 0.2% in July, matching the pace set in June.
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Core CPI: Excluding the volatile food and energy indexes, core CPI is considered a more reliable indicator of underlying price growth. However, little relief is expected in this regard, with economists forecasting a 0.2% increase in core inflation for July, identical to June’s rise. This would result in core inflation persisting at the 4.8% annual pace witnessed in June.
These figures will be scrutinized by the Federal Reserve as it prepares for its policy-making committee meeting in September, where interest rates will be reviewed. This data follows closely after the July jobs report, which revealed higher-than-anticipated average hourly earnings growth of 4.4% annually. Most economists view a level of around 3.5% as consistent with the Fed’s desired 2% annual inflation rate.
Additionally, these initial July figures could indicate a trend of sideways movement in the annual rate of headline inflation, rather than the continuous slowing observed in the past year. Experts attribute this to “base effects” from last spring and early summer, when rapid inflation peaks were observed. In comparison, this spring and early summer saw price increases decelerating significantly, leading to a decline in inflation levels.
Overall, these insights into inflation trends highlight the complex nature of economic dynamics and the challenges of reaching desired inflation targets.
Inflation Concerns and the Outlook for Interest Rates
Given that price growth began slowing in July of last year, economists are growing concerned that headline inflation may not fall much further in the near term. Andrew Patterson, a senior international economist with Vanguard, expresses reservations about a seamless path towards achieving 2% inflation by next year. These concerns will be of particular importance to the Federal Reserve as it considers whether or not to raise interest rates at its September meeting.
July’s milder inflation data is expected to be primarily driven by declining goods prices, as supply-chain problems ease. Both new and used car prices are anticipated to fall, along with furniture and computer prices. On the other hand, there will likely be more pricing pressure within the services sector due to higher-than-expected wage growth in July. Although travel services experienced significant declines in June, they are not expected to do so again in July. Additionally, while shelter inflation is slowing, it remains stable.
The Federal Reserve has been cautious not to overreact to a single month or two of cooling inflation data, as this would not be enough to halt their plans of raising interest rates. However, a relatively mild July report that aligns with expectations could indicate that the situation is moving in the right direction.
BNP Paribas economists led by Carl Riccadonna suggest that if the trend of core inflation continues in the expected manner, it may sway more Fed officials to favor a pause in September. This could ultimately lead to a unanimous decision to keep rates steady at the September Federal Open Market Committee (FOMC) meeting.
The Consumer Price Index (CPI) data will be released by the Labor Department at 8:30 a.m.
