Evelyn Reynolds

Signs reading, ‘please bear with us: we are currently experiencing interruptions in our supply chain which may affect the availability of certain products,’ is seen taped to the drive-up menu at a Wendy’s restaurant on May 06, 2020 in Miami, Florida. 
Joe Raedle | Getty Images News | Getty Images

Inflation rose as expected in July, driven by higher housing-related costs, according to a Labor Department report Wednesday that is likely to keep an interest rate cut on the table in September.
The consumer price index, a broad-based measure of prices for goods and services, increased 0.2% for the month, putting the 12-month inflation rate at 2.9%. Economists surveyed by Dow Jones had been looking for respective readings of 0.2% and 3%.

Excluding food and energy, core CPI came in at a 0.2% monthly increase and a 3.2% annual rate, meeting expectations.

The annual rate is the lowest since March 2021, while the core is the lowest since April 2021, according to the Bureau of Labor Statistics report. Headline inflation was 3% in June.
A 0.4% increase in shelter costs was responsible for 90% of the all-items inflation increase. Food prices increased 0.2% while energy was flat.
Stock market futures were mildly negative after the report while Treasury yields were mostly higher.

Though food inflation was soft on the month, multiple categories saw sizeable increases, most notably eggs, which were up 5.5%. Cereals and bakery items declined 0.5% while dairy and related products fell 0.2%.

Inflation readings have been gradually drifting back to the central bank’s 2% target. A report Tuesday from the Labor Department showed that producer prices, a proxy for wholesale inflation, rose just 0.1% in July and were up 2.2% year over year.
Fed officials have indicated a willingness to ease, though they’ve been careful not to commit to a specific timetable nor to speculate about the pace at which cuts might occur. Futures market pricing currently points to about an even chance of a quarter- or half-percentage point reduction at the Sept. 17-18 meeting and at least a full point in moves by the end of 2024.
As inflation has eased, percolating concerns about a slowing labor market seemed to have raised the likelihood that the Fed will start cutting for the first time since the early days of the Covid crisis.
“Coming down but the sticky areas continue to be sticky,” Liz Ann Sonders, chief investment strategist at Charles Schwab, said in describing the CPI report. “We have to keep a close eye on both the inflation data as well as the employment data.”
There were several crosscurrents in the report that indeed suggest inflation is stubborn in some areas.
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Economists surveyed by Dow Jones expect the consumer price index, to be released Wednesday at 8:30 a.m. ET, to show 0.2% increases on both the all-items reading and the core measurement.
A positive CPI reading could mean the Federal Reserve is able to turn its gaze to other economic challenges, such as the slowing labor market.
“Inflation is almost a nonissue at this point. There’s this broad expectation that the worst is easily behind us,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

Product prices as seen at Walmart. 
Courtesy: Walmart

The news Tuesday was good for inflation, and investors hope it will get even better Wednesday when the Labor Department releases the July consumer price index report.
With the score being one down, one to go on confirming that the early-year jump in prices either was a fluke or the last gasp of inflation, a positive CPI reading could mean the Federal Reserve is able to turn its gaze to other economic challenges, such as the slowing labor market.

“At this point, the inflationary pressure that we saw build has really been dissipated significantly,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Inflation is almost a nonissue at this point. There’s this broad expectation that the worst is easily behind us.”
Like others on Wall Street, Baird expects the Fed in September to shift its focus from tight policy to tackle inflation to a somewhat easier stance to head off a potential weakening in the jobs picture.
While consumers and business owners continue to express concern over high prices, the trend indeed has shifted. Tuesday’s producer price index, or PPI, report for July helped confirm optimism that the elevated inflation numbers that began in 2021 and spiked again in early 2024 are in the rearview mirror.

The PPI report, seen as a gauge of wholesale inflation, showed prices up just 0.2% in July and about 2.2% from a year ago. That number is now very close to the Fed’s 2% goal and indicative that the market’s impulse for the central bank to start cutting rates is about on target.
Economists surveyed by Dow Jones expect the CPI similarly to show 0.2% increases on both the all-items reading and the core measurement that excludes food and energy. However, that is projected to show respective 12-month rates of 3% and 3.2% — well below their mid-2022 highs but still a good distance from the Fed’s 2% target.

Still, investors are looking for the Fed at its September meeting to start cutting interest rates, considering that inflation is weakening and so is the labor market. The unemployment rate has now risen to 4.3%, a 0.8 percentage point increase over the past year that has triggered a time-tested recession flag known as the Sahm Rule.
“Given the focus on the relative weakening in the labor market, given the fact inflation is coming down pretty rapidly, and I expect it will continue over the next few months, it would be a surprise if the Fed didn’t start moving towards easing very quickly, presumably at the September meeting,” Baird said. “If they don’t at the September meeting, the market is not going to take kindly to that.”

Worries over slow Fed response

A brief pickup in weekly initial unemployment claims, combined with other weakening economic metrics, briefly had some in the market looking for an emergency rate cut.
While that sentiment has dissipated, there’s still worry about the Fed being slow to ease, just as it was slow to tighten when inflation began to escalate.
Another benign inflation report “makes the Fed completely comfortable that they can shift their focus away from inflation and toward labor,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “They could have shifted their attention from inflation to labor … months ago. There are cracks forming in the labor market backdrop.”
Amid the twin realities of declining inflation and rising unemployment, markets are pricing in the absolutely certainty of a rate cut at the Sept. 17-18 Fed meeting, with the only question left being how much. Futures pricing is roughly split between a quarter- or half-point reduction, and leaning heavily to the likelihood of a full percentage point reduction by the end of the year, according to CME Group calculations.
However, futures pricing has been well off the mark for most of the year. Traders started the year anticipating a rapid pace of cuts, then pulled back into expecting only one or two before the latest swing in the other direction.
“I’m as curious about [Wednesday’s] inflation report as anyone else, but I think it would take a real outlier to change the Fed’s tune from 1) shifting to labor as its focus, and 2) seriously thinking about cutting in September,” Porcelli said. “They should start off aggressively. I can easily make the argument for the Fed to cut 50 basis points just to kick things off because I think they should have been cutting already. I don’t think that’s what they will do. They’ll start it off modestly.” More

The producer price index, a measure of wholesale inflation, increased 0.1% on the month, less than 0.2% forecast. PPI excluding food and energy was flat.
On a year-over-year basis, headline PPI rose 2.2%, a sharp drop from the 2.7% reading in June.

A key measure of wholesale inflation rose less than expected in July, opening the door further for the Federal Reserve to start lowering interest rates.
The producer price index, which measures selling prices that producers get for goods and services, increased 0.1% on the month, the Labor Department’s Bureau of Labor Statistics reported Tuesday. Excluding volatile food and energy components, the core PPI was flat.

Economists surveyed by Dow Jones had been looking for an increase of 0.2% on both the all-items and the core readings.
A further core measure that also excludes trade services showed a rise of 0.3%.
On a year-over-year basis, the headline PPI increased 2.2%, a sharp drop from the 2.7% reading in June.
Stock market futures rose following the news while Treasury yields moved lower.
The wholesale inflation reading was relatively tame despite a 0.6% jump in final demand goods prices, the biggest move higher since February and due primarily to a 1.9% surge in energy, including a 2.8% increase in gasoline.

Countering the move was a 0.2% slide in services, the biggest move lower since March 2023, according to the BLS. Trade services prices fell 1.3% while margins for machinery and vehicles wholesaling tumbled 4.1%. An increase of 2.3% in portfolio management offset some of the decline in services prices.
The PPI is considered a leading indicator for inflation as it gauges pipeline inflation from the perspective of manufacturers and suppliers of goods and services. Its counterpart, to be released Wednesday, is the consumer price index, which measures the actual prices consumers pay in the marketplace. Economists also expect 0.2% monthly increases for both headline and core CPI.
Both measures are watched closely for inflation signs. Though the Fed more closely focuses on the Commerce Department’s personal consumption expenditures price index, the CPI and PPI both feed into that calculation.
The latest inflation data comes with markets fully pricing in an interest rate cut at the September meeting of the Fed’s open market committee. The main question now is whether the central bank will cut by a quarter or a half percentage point. The futures market currently rates it a toss-up.
Fed officials have vowed to keep up the inflation fight until they have reached their 2% goal, and the latest data for the most part has been cooperating.
A survey the New York Fed released Monday showed that consumers’ view of inflation three years from now fell to 2.3%, the lowest in the 11-year history of the survey.
Moreover, the survey also showed consumers, particularly at the lower end of the income scale, are beginning to suffer more from inflation. For instance, the perceived likelihood of missing a minimum debt payment in the next three months jumped to 13.3%, the highest since April 2020, with the biggest part of the 1 percentage point monthly increase coming from households with annual income below $50,000.
Expectations for credit access also declined, and household spending expectations over the next year fell to their lowest level since April 2021.

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The New York Fed’s Survey of Consumer Expectations put the three-year inflation outlook at 2.3%, the lowest in a data series going back to June 2013.
Household spending is expected to increase by 4.9%, which is 0.2 percentage point lower than in June and the lowest reading since April 2021.

People shop at a grocery store in Brooklyn on July 11, 2024 in New York City.
Spencer Platt | Getty Images

Consumers grew more confident in July that inflation will be less of a problem in the coming years, according to a New York Federal Reserve report Monday that showed the three-year outlook at a new low.
The latest views from the monthly Survey of Consumer Expectations indicate that respondents see inflation staying elevated over the next year but then receding in the next couple of years after that.

In fact, the three-year portion of the survey showed consumers expecting inflation at just 2.3%, down 0.6 percentage point from June and the lowest in the history of the survey, going back to June 2013.
The results come with investors on edge about the state of inflation and whether the Federal Reserve might be able to reduce interest rates as soon as next month. Economists view expectations as a key for inflation as consumers and business owners will adjust their behavior if they think prices and labor costs are likely to continue to rise.
On Wednesday, the Labor Department will release its own monthly inflation reading, the consumer price index, which is expected to show an increase of 0.2% in July and an annual rate of 3%, Dow Jones estimates show. That’s still a full percentage point away from the Fed’s 2% goal but about one-third of where it was two years ago.
Markets have fully priced in the likelihood of at least a quarter percentage point rate cut in September and a strong likelihood that the Fed will lower by a full percentage point by the end of the year.
While the medium-term outlook improved, inflation expectations on the one- and five-year horizons stood unchanged at 3% and 2.8%, respectively.

However, there was some other good inflation news in the survey.
Respondents expect the price of gas to increase by 3.5% over the next year, 0.8 percentage point less than in June, and food to see a rise of 4.7%, which is 0.1 percentage point lower than a month ago.
In addition, household spending is expected to increase by 4.9%, which is 0.2 percentage point lower than in June and the lowest reading since April 2021, right around the time when the current inflation surge began.
Conversely, expectations rose for medical care, college education and rent costs. The outlook for college costs jumped to a 7.2% increase, up 1.9 percentage points, while the rent component — which has been particularly nettlesome for Fed officials who have been looking for housing costs to decline — is seen as rising by 7.1%, or 0.6 percentage point more than June.
Expectations for employment brightened, despite the rising unemployment rate. The perceived probability of losing one’s job in the next year fell to 14.3%, down half a percentage point, while the expectation of leaving one’s job voluntarily, a proxy for worker confidence about opportunities in the labor market, climbed to 20.7%, a 0.2 percentage point increase for the highest reading since February 2023.

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