What Happened?

For the first time in several months, US inflation was softer than expected in July. Headline and core CPI were 0.0% and +0.3% month-over-month, respectively. That leaves the year-over-year figures at 8.5% for headline CPI and 5.9% for core CPI. Both are obviously still far too high, of course, but less ‘too high’ than they were expected to have been—and for the markets, that’s what matters, for now.

The Moving Pieces

Lower gasoline prices pulled down the headline for July and will likely do so again in August. On Services, which tend to be a “sticky” and persistent category, this month’s 0.3% month-over-month print was largely the result of a handful of volatile categories (e.g., airfares, hotels, used cars) all printing negative in the same month. That’s great for this month but it’s unlikely to be repeated; this is the first month all year in which all of these categories printed with the same sign (positive or negative) in the same month. Airfares, in particular, seem unlikely to fall 8% month-over-month on an ongoing basis given the stresses in that industry.

Implications for Interest Rate Hikes

Despite the good news on the surface, we don’t think the latest print meets the hurdle for “significant easing of inflationary pressures” in the way that the Fed will think about it. They will need to see several months of improved inflation to become confident that they can stop tightening policy; Wednesday’s number, in and of itself, isn’t good enough to start that process.

That said, with the debate around the size of the Fed’s September meeting hike ongoing, the most recent print will certainly increase the market’s perceived odds of a 0.50% hike rather than 0.75%. And yet, we would caution that there is another CPI print and another payroll number between now and the next Fed meeting. As such, it’s a mistake to have too much conviction, yet, about what is likely to happen at that meeting. We continue to expect 0.50%, but that is a view lightly held, pending next month’s data flow.

Implications for Investors

We continue to see and expect elevated volatility around key macro data points as their implications for the policy path and for the pace of economic activity and earnings growth remain outsized for the time being. The recent stock and bond market reaction is consistent with that expectation. As we look ahead to upcoming data releases, we anticipate further volatility.

 

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GE-4899782.1 (08/22) (exp.08/24)

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