July CPI: Foot off the gas

Summary

Consumer price inflation surprised to the downside in July, with the headline index flat over the month and core prices rising 0.3%. Falling prices for gasoline used autos and travel service categories such as airline fares, car rentals and lodging away from home helped cool monthly inflation from the torrid pace seen in May and June. Unlike the previous two CPI reports, today's CPI release provides some welcome news for members of the FOMC. That said, monetary policymakers have made clear that they need to see clear evidence of a sustained slowdown in inflation before pivoting on monetary policy. To that end, core CPI is still up 5.9% year-over-year and has grown at a 6.8% annualized pace over the past three months. In our view, it will take several more soft inflation prints before the FOMC begins to feel confident that it is getting price pressures in check. At least a 50 bps rate hike at the September FOMC meeting remains the most likely outcome.

Relief at the pump, but not at the grocery store

CPI inflation in July cooled from the scorching hot pace seen in May and June. Consumer prices were unchanged in July, the smallest month-over-month change since May 2020. On a year-ago basis, prices were up 8.5%, down from the 9.1% year-over-year pace registered in June. Falling gasoline prices were a major contributor to the slowdown in price growth. Motor fuel prices were down 7.6% in July on a seasonally adjusted basis. Through the first half of August there has been some additional relief at the pump, and we would not be surprised to see another sizable decline in motor fuel prices in next month's CPI release. Energy services inflation also eased to just 0.1% from 3.0% and 3.5% in May and June, respectively, as natural gas prices receded in early July.

Grocery store shoppers did not see similar relief when checking out. Consumer prices for food at home rose 1.3%, another robust print that pushed the year-over-year increase to 13.1%, the highest since 1979. Food away from home prices rose a smaller but still-hot 0.7%. We expect some moderate cooling in food price growth to eventually take hold as agricultural commodity prices have declined in recent months and transportation costs have eased a bit. However, for the time being food inflation remains one of the biggest squeezes on households' already constrained budgets.

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