Sentiment was almost unanimous on Wednesday: A 25-basis-point Federal Reserve interest-rate cut in September is the base expectation, and even more could be in the cards, after July’s consumer priced index (CPI) showed year-over-year inflation dipped below 3% for the first time in more than three years.
The U.S. Bureau of Labor Statistics said on Wednesday that June’s consumer price index, which measures the change in prices on a variety of consumer goods and services, was 0.2% higher compared to June on a seasonally adjusted basis. Dow Jones-polled economists had expected the same.
The bigger news was a 2.9% year-over-year change in inflation, which not only was shy of expectations and June’s CPI figure (both 3.0%), but marked the first time since March 2021 that consumer prices had risen by less than 3% on a YoY basis.
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“Core” CPI—a measurement that backs out food and energy costs, which are more volatile than the other costs tracked by the Labor Department—came in right about where economists expected, at +0.2% month-over-month. The same was true about year-over-year core CPI, which remained the same as it was in June (at 3.2%), in line with estimates.
Here’s a quick look at July’s key CPI figures:
- MoM CPI: +0.2% (vs. +0.2% est.)
- YoY CPI: +2.9% (vs. +3.0% est.)
- MoM Core CPI: +0.2% (vs. +0.2% est.)
- YoY Core CPI: +3.2% (vs. +3.2% est.)
A September rate cut seemed likely following June’s dip in consumer prices, and then upgraded to a foregone conclusion following a big payrolls miss in the July jobs report.
Wednesday’s CPI report changed little.
“The relay race to Fed cuts is on!” says Lindsay Rosner, Head of Multi-Sector Fixed Income at Goldman Sachs Asset Management. “Today’s CPI print of a rounded 0.2% cleared the way for a 25-basis-point cut in September while not completely shutting the door on the chance of a 50-bps cut. … The Fed is on track to cut some amount in September, and we’ve got two more legs of this race to go—CPI and NFP.”
“To see a two-handle on year-over-year CPI continues to show another nice reminder that inflation is cooling and the surge we saw in the first quarter is a thing of the past,” adds Ryan Detrick, Chief Market Strategist at Carson Group. “The Fed’s dual mandate is price stability and full employment, which suggests the risks are tilted firmly to the latter. We aren’t sure what more the Fed needs to see to act, as the move higher in the unemployment rate lately should be in their crosshairs.”
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Most price changes were largely constrained on a month-over-month basis in July. Used cars and trucks were the biggest decliner, with prices lower by 2.3% (and 10.9% year-over-year). Utility gas service was down by 0.7%, while apparel prices slipped by 0.4%. Fuel oil saw the largest increase at 0.9% month-over-month, though it was still down 0.3% year-over-year.
“Core services inflation did pick up slightly in July, again, largely because June’s data were so weak,” says Gargi Chaudhuri, BlackRock’s Chief Investment and Portfolio Strategist, Americas. “Core services prices grew +0.31% MoM last month. The Fed is still paying close attention to core services inflation particularly. The Fed signaled in July’s FOMC meeting that they have more confidence in the trajectory of inflation, influenced by the slowdown in stickier components of inflation that finally arrived in June, like housing prices.”
More Pros’ Takes on July CPI
Here, we outline more thoughts from the experts on what July’s CPI numbers mean for consumers, markets, the Federal Reserve’s future actions, and more:
Josh Jamner, Investment Strategy Analyst, ClearBridge Investments
“The in-line inflation print should not prove an obstacle to the Fed commencing with interest rate policy normalization next month. Upside relative to June came primarily from shelter, with both rent and [owners’ equivalent rent, or OER] ticking up. Shelter inflation is likely to continue to fade given its well-understood lags, likely leading to a continuation of disinflationary trends in the coming months for headline inflation measures.
“The read-through from CPI to the Fed’s preferred core PCE measure is for another month in the 0.1%-0.2% range, which should help afford the Fed greater comfort that the U.S. economy is headed toward a return to the Fed’s 2% target over time. This helps shift the balance of risks further toward the maximum employment side of the dual mandate, meaning jobs data will likely be under even greater scrutiny in the months ahead.”
Peter Graf, Chief Investment Officer, Nikko Asset Management Americas
“The in-line CPI threads the needle of teeing up a September rate cut without setting off alarm bells on consumption and corporate pricing power. It relieves the pressure on [the FOMC meeting at] Jackson Hole by taking 50 basis point cuts out of the conversation and lets Wall Street go back on vacation until Labor Day.”
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Scott Helfstein, SVP, Head of Investment Strategy, Global X
“Average hourly earnings came in slightly below expectations, but this seems like a goldilocks report for the Fed. This is further evidence that consumers are re-anchoring inflation expectations in line with the Fed mandate. … Chair Powell should take a victory lap in Jackson Hole and try to talk the market to a 25-basis-point cut in September. Futures are currently pricing in a cut of almost 50 basis points for September, and the Fed is unlikely to deliver that outcome.”
John Kerschner, Head of US Securitised Products and Portfolio Manager, Janus Henderson Investors
“While Wall Street was quick to price in additional Fed rate cuts last week given the mini-crisis, Fed Governors including Raphael Bostic from the Atlanta Fed pushed back on these forecasts saying a ‘little more data’ was needed to support such cuts. For market participants, it was a matter if you believed the slower inflation numbers that we saw at the end of 2023, where core CPI inflation was coming in at the low 3%, or the hotter numbers that came in at the beginning of 2024 where it was coming in at mid-4% levels.
“Today’s number confirms that the overall trajectory of inflation is lower. While the YoY number for core CPI is 3.2%, the three-month annualized number is a downright chilly 1.6%, well below the Fed’s target of 2%.”
Jason Pride, Chief of Investment Strategy & Research, Glenmede
“Today’s CPI release effectively rolls out the red carpet for rate cuts to begin in September. While there is still one more CPI report to be seen before the FOMC gathers again, the July report solidified some nascent trends that will likely give them the confidence they need to pare back on tight policy. In fact, what probably matters most is the real level of Fed funds; as inflation continues to fall one could argue that not paring back on rates represents de facto further tightening. That’s something the Fed will want to avoid, especially given concerns over the state of the labor market.
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“Going forward, four rate cuts by year-end appears to be the base case, starting off a methodical normalization process for rates that’s likely to continue into 2025.”
Gargi Chaudhuri, Chief Investment and Portfolio Strategist, Americas, BlackRock
“It is not our view that we are entering a U.S. recession, but the most recent [purchasing managers’ indexes] and nonfarm payrolls report showed a gradually cooling economy. Today’s CPI print, which showed volatility in shelter inflation, as well as the NFP report, support a 0.25% cut at September’s FOMC meeting. Investors are pricing in up to 4 cuts this year—we think the market is getting ahead of itself and expect only 2-3 cuts before the end of the year. We are keeping an eye on tomorrow’s retail sales report for further data on the health of the U.S. consumer.”
