S&P 500 and Nasdaq jump higher as key inflation figures are released

Tuesday’s PPI data serves as the latest to support arguments for Fed rate cuts. It will also provide one of the key data points shaping the Federal Reserve’s future interest rate policy: the July Consumer Price Index (CPI).

The inflation report, which will be released at 8:30 a.m. (ET) on Wednesday, is expected to show headline inflation of 3.0%, unchanged from June figures.

Last month, consumer prices are expected to rise 0.2%, up from the previous month’s decline of 0.1%, as energy prices are expected to largely rebound.

On a core basis, which excludes the more volatile costs of food and gas, prices are expected to have risen 3.2% in July from last year, a slowdown from the annual increase from 3.3% in June. However, monthly core prices are expected to rise 0.2%, compared with a 0.1% increase in June, according to Bloomberg data.

“June CPI surprised on the negative,” Bank of America economist Michael Gapen wrote in a note ahead of the report. “We expect some of that surprise to dissipate in July.”

Note that June’s data marked the first time since May 2020 that the monthly CPI came out negative. It was also the slowest annual price increase since March 2021.

While July inflation data is unlikely to be as low as June’s, it is in line with the previous deflation trend and should meet the Fed’s benchmark for starting rate cuts in September, Gapen said.

Core inflation has remained stubbornly high due to higher costs for shelter and core services such as insurance and medical care.

Shelter prices are expected to reverse June’s slowdown after the index for rent and owner’s equivalent rent (OER) recorded their smallest monthly increases since August 2021. Owners equivalent rent is the hypothetical rent that a homeowner would pay for the same property.

Non-domestic services also fell in June, “due in large part to a decline in airfares. However, for July we expect the decline in airfares to be much more moderate,” Bank of America’s Gapen said.

“Inflation in non-household services should ease over time given cooling wage inflation in services; However, a sustained period of deflation is unlikely,” he warned.

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