The Consumer Price Index (CPI) rose in July for the first time in 12 months—but economists are still optimistic about inflation.
- The U.S. Bureau of Labor Statistics released its data for the month of July on Thursday.
- The CPI increased from 3% in June to 3.2%, while core prices dropped from 4.8% in June to 4.7%.
- Monthly figures show overal CPI rose 0.2%, which is the same as June’s 0.2% increase.
- Analysts blame the uptick on “base effects” from July 2022’s energy price decreases, in addition to high shelter costs up 7.7% from July 2022.
- Major stock indexes—including the S&P 500 (+0.64%), Dow 30 (+0.70%), and Nasdaq (+0.68%)—held strong after the announcement, briefly rallying after the news was released.
Why It’s Important
After 16 months of Federal Reserve interest rate hikes and two years of inflation, the news of uptake in inflation would normally elicit fears and concerns about the overall direction of the economy, with otherwise optimistic analysts rethinking their claims about a “soft landing.”
However, minor good news within the data has analysts feeling confident. Underlying price pressures appear to be moving in the same direction as before. Monthly figures holding steady and continued decreases in core prices could signal that inflation will not resurge, with analysts arguing that the core price is a better indicator of inflation than the CPI. The core numbers reflect the smallest increases in two years.
This will likely affect the Fed’s decision-making on whether to hike interest rates again at its upcoming September 19–20 meeting. When the Fed hiked rates at the July meeting, Fed Chair Jerome Powell was cagey about promising whether or not to hike rates again, saying that the bank will deliberate based on available data and make a decision month-to-month.
Further signs of cooling may convince the Fed to hold off. However, it has made it clear that it is worried that lowering the CPI down to its goal of 2% is going to face its stickiest challenges for the final 1%, with entrenched prices and high shelter continuing to keep inflation about its goal. Powell has repeatedly acknowledged that this could spark a recession or a labor crisis but believes lowering inflation is more critical.
“Through the noise, I see an inflation story that is certainly not solved, but it’s improving,” Wells Fargo economist Michael Pugliese tells The Wall Street Journal.
“While inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates. Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view,” Principal Asset Management strategist Seema Shah tells Bloomberg.