As investors eagerly await the release of July’s Consumer Price Index (CPI) on Wednesday, the implications for future Federal Reserve interest rate policy loom large. This key data point will provide insight into the current state of inflation and its potential impact on the economy.
Expectations are for the headline inflation rate to remain steady at 3.0% in July, unchanged from the previous month. However, monthly consumer prices are anticipated to have risen by 0.2%, reversing the slight decline seen in June. One factor contributing to this uptick is the expected increase in energy prices.
When looking at core inflation, which excludes the more volatile costs of food and gas, prices are expected to have risen by 3.2% over the past year, slightly lower than the 3.3% increase seen in June. Monthly core prices are also expected to rise by 0.2%, up from a 0.1% increase in the previous month.
Bank of America economist Michael Gapen noted that June’s CPI data was a surprise to the downside, with headline CPI registering negative for the first time since May 2020. This resulted in the slowest annual price increase since March 2021. While July’s inflation data is expected to show improvement, it is likely to align with the overall trend in inflation and could influence the Fed’s decision on rate cuts in September.
Core inflation has remained elevated, driven by higher costs of shelter and core services such as insurance and medical care. Housing prices are expected to rebound in July after a slowdown in June, particularly with rent and owners’ equivalent rent (OER) showing minimal increases previously.
Looking ahead, non-housing services inflation is expected to moderate over time, but sustained deflation is unlikely. While airfares saw a significant decline in June, the expectation is for a more moderate decrease in July.
The Producer Price Index (PPI), which measures wholesale inflation and often signals consumer price movements, came in below expectations in July, further bolstering the case for Fed rate cuts. This could provide a positive outlook for equities as market sentiment improves. With inflation remaining above the Fed’s 2% target, recent economic data has fueled discussions about the potential for rate cuts sooner rather than later.
As markets anticipate a rate cut by the end of the Fed’s September meeting, the odds of a 50 basis point cut versus a 25 basis point cut are now evenly split. This shift follows recent developments in economic data and market conditions.
Stay tuned for the latest updates on the CPI release and its implications for financial markets. For more insights on stock market news and in-depth analysis, including events that move stocks, visit Extreme Investor Network. Stay informed with the latest financial and business news from our platform to make informed investment decisions.