July CPI: No bad news is good news

Summary

The July CPI data were largely in line with expectations. Both headline and core CPI increased by 0.2% in July (0.15% and 0.17%, respectively), just a basis point or two off from our forecast going into the release. The details of the report contained a few surprises. Core goods prices fell more than we expected, led by another large (-2.3%) decline in used vehicle prices. Core services inflation was a bit hotter than anticipated, led by rebounds in inflation for housing, recreation and communication services.

The broad narrative of continued disinflation remains unchanged. Headline CPI fell below 3% year-over-year for the first time since March 2021. Core CPI declined to 3.2% year-over-year, the slowest pace since April 2021 and roughly half the 6.6% peak hit in September 2022. Furthermore, the annualized pace of core CPI inflation over the past six and three months has been 2.8% and 1.6%, respectively.

Today's data leave the FOMC in a holding pattern and do not settle the 25 bps or 50 bps debate for September. As we go to print, markets view September as roughly a coin flip between the two outcomes. The continued steady slowdown in inflation, when paired with the rise in the unemployment rate and deterioration in other labor market indicators, leads us to believe the FOMC will want to move quickly towards a more neutral policy stance in the months ahead. As a result, we expect a 50 bps rate cut at the September FOMC meeting, but the decision ultimately may be determined by the August employment report to be released on September 6 and the August CPI report to be released on September 11. Chair Powell's expected speech at the Jackson Hole conference on August 23 looms large as the FOMC weighs the balance of risks to its dual mandate.

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