The latest iteration of the monthly Consumer Price Index (CPI) report revealed that the disinflation trend continued in July, galvanizing widespread expectations that the Federal Reserve will dial up a September interest rate cut.
The CPI, released this week by the U.S. Bureau of Labor Statistics (BLS), increased 0.2% month over month during July, following a June that saw a 0.1% retreat in the broadly watched inflation metric. More notably, the CPI rose just 2.9% in the 12 months through July, marking the first time in over three years that inflation has come in below the 3% threshold.
July’s CPI data came a little better than, though generally in line with expectations. A Reuters poll of economists had forecast a month-over-month CPI of 0.2% and a year-over-year reading of 3.0%.
The core CPI, which excludes prices from the volatile food and energy sectors, came in at 0.2% month over month and 3.2% year over year, meeting projections. The annual core CPI is at its lowest since 2021.
The few surprises that came packaged within the report were relatively minor: core goods prices saw stronger disinflation, while core services inflation ran stronger than predicted, thanks in part to housing inflation that, while down, remains stubbornly sticky. The BLS report noted that the shelter index, which is weighted to account for more than one-third of the overall CPI, made up almost 90% of July’s monthly total CPI increase.
“Finally, the rate of price increases at the cash register continues to slow down after a couple of years of painful surges, signaling a victory for the Fed’s monetary policy,” said Selma Hepp, chief economist at CoreLogic. “This means for the average American that the Fed will likely cut interest rates next month, which will slightly bring down the cost of borrowing — a good step for auto and home sales, in particular.”
What this latest report doesn’t give is any clearer signal on whether the expected rate cut could (or should) be a reduction of 25 basis points or 50. In commentary from Wells Fargo, economists Sarah House and Michael Pugliese noted that “markets view September as roughly a coin flip between the two outcomes.”
“The continued steady slowdown in inflation, when paired with the rise in the unemployment rate and deterioration in other labor market indicators, leads us to believe the [Federal Reserve] will want to move quickly towards a more neutral policy stance in the months ahead,” they said. “As a result, we expect a 50 bps rate cut at the September FOMC meeting, but the decision ultimately may be determined by the August employment report to be released on Sept. 6 and the August CPI report to be released on Sept. 11.”
