The latest Consumer Price Index (CPI) showed more progress on inflation, as consumer prices rose 2.9% for the 12 months ending in July. This marked a slowing from June’s 3% annual gain and the first time CPI fell below 3% since March 2021. The Core measure, which strips out volatile food and energy prices, increased 0.2% from June while the annual reading declined from 3.3% to 3.2%.
Shelter and motor vehicle insurance costs were key reasons for the pricing pressure that was seen last month, with the shelter component driving 90% of the monthly increase in the all items index, per the Bureau of Labor Statistics. Many other major items (such as energy, new/used cars, and airline fares) actually saw prices flat to down in July. This suggests that most of inflation has been quelled except for a few key areas that are keeping it artificially high.
What’s the bottom line? Cooling consumer inflation combined with signs that the economy and job market are slowing have led to growing calls for the Fed to begin cutting their benchmark Fed Funds Rate, which is the overnight borrowing rate for banks. Currently, there are near certain odds that the Fed will cut rates at their next meeting on September 18, though additional reports released between now and then will play a pivotal role in this decision. On the inflation front, Fed members will want to see continued progress lower in the next Personal Consumption Expenditures (August 30) and Consumer Price Index (September 11). The Fed will also closely dissect the August Jobs Report (September 6) for further signs of labor sector weakness or rising unemployment, which could also impact the size of a potential cut.