Fed: A 75 bps rate hike at the next meeting remains our base case – Wells Fargo

The US Consumer Price Index surprised to the downside in July, showed data released on Wednesday. Analysts at Wells Fargo point out that 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. They consider it will take several more soft inflation prints before the FOMC begins to feel confident that it is getting price pressures in check. They expect at least a 50 bps rate hike at the September meeting.

Key Quotes: 

“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.”

“It is important to remember that this is just one data point, and the past couple CPI reports have included significant upside surprises. In addition, there have been head fakes in the inflation data before, and we highly doubt the FOMC is ready to declare victory over inflation after just one softer-than-expected CPI report. Core CPI is still up 5.9% year-over-year and has grown at a 6.8% annualized pace over the past three months. The next CPI report will be released on September 13, just one week before the next FOMC meeting. A 75 bps rate hike at that meeting remains our base case, but the FOMC could go "just" 50 bps if that report provides additional evidence that inflation is slowing on a sustained basis.”