Finance
Inflation is expected to remain stable in July as investors eye rate cuts
On Wednesday, investors will digest one of the most important data points that will determine the Federal Reserve’s future interest rate policy: the July Consumer Price Index (CPI).
The 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.
To cut or not to cut?
Ahead of Wednesday, the Producer Price Index (PPI) came in cooler than expected in July, raising investor expectations and further emphasizing the case for Fed rate cuts.
U.S. producer prices, a key measure of wholesale inflation and often a signal of the direction of consumer prices, rose just 0.1% month-over-month last month after rising 0.2% in June. The pace was below economists’ expectations. The index rose 2.2% year over year, just above the Federal Reserve’s inflation target of 2%.
“It’s positive for stocks,” John Stoltzfus, chief investment strategist at Oppenheimer, told Yahoo Finance’s Morning Brief on Tuesday morning. ‘It releases some of the dark sentiment that had taken hold [the market] during the start this month. We can’t help but think this gives the Federal Reserve an opportunity to cut rates.”
Inflation has remained above the Federal Reserve’s 2% annualized target. But recent economic data, including a jobs report that sparked a sell-off in July, have contributed to the idea that the central bank should cut rates sooner rather than later.
Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, showed inflation in June was unchanged from the previous month and marked the slowest annual increase for the core PCE in more than three years.
As of Tuesday, markets were pricing in a nearly 100% chance that the Federal Reserve would cut rates by the end of its September meeting. However, the odds of a 50 basis point cut or a 25 basis point cut are now split 50/50 after a roughly 60/40 chance that traders posted last week. according to the CME FedWatch Tool.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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