On Wednesday, investors will be digesting July’s Consumer Price Index (CPI), one of the most important data points that will shape the Federal Reserve’s interest rate policy going forward.
The report, scheduled to be released at 8:30 a.m. ET on Wednesday, is expected to show headline inflation at 3.0%, unchanged from June.
On a month-on-month basis, consumer prices are expected to rise 0.2%, up from a 0.1% decline in the previous month, as energy prices are expected to rise again.
On a “core” basis, which excludes volatile costs like food and gasoline, prices are expected to rise 3.2% year-on-year in July, slowing from a 3.3% year-on-year increase in June, but monthly core prices are expected to rise 0.2% after a 0.1% increase in June, according to Bloomberg data.
The next update on consumer price inflation is scheduled for Wednesday morning. (AP Photo/David Zalubowski, File) (The Associated Press)
“June’s CPI reading was below expectations and a surprise,” Bank of America economist Michael Gapen wrote in a note before the report was released. “We expect some of the surprise to reverse in July.”
The June data marked the first negative monthly headline CPI reading since May 2020. It also marked the lowest annual price increase since March 2021.
Gapen said July’s inflation reading “will not be as low as June’s, but is consistent with historical deflationary trends and should meet the Fed’s threshold for starting to cut rates in September.”
Core inflation remains stubbornly high due to rising costs of housing, insurance, health care and other core services.
House prices are expected to reverse from a slowdown in June after the rent index and owner’s equivalent rent (OER) recorded their smallest monthly increase since August 2021. Owner’s equivalent rent is the hypothetical rent that a homeowner would pay for the same property.
Bank of America’s Gapen noted that non-residential services also fell slightly in June, “largely due to the sharp decline in airfares, but we expect airfare declines to be much more modest in July.”
“Given slowing wage inflation in the services sector, non-residential inflation should ease over time, but prolonged deflation is unlikely,” he warned.
To cut or not to cut?
Heading into Wednesday, the Producer Price Index (PPI) for July came in weaker than expected, raising investor hopes and further underscoring the need for the Fed to cut interest rates.
The U.S. producer price index, a key gauge of wholesale prices and often a signal of how consumer prices are trending, rose just 0.1% from the previous month last month after rising 0.2% in June, below economists’ expectations. The index was up 2.2% from a year earlier, just above the Federal Reserve’s 2% inflation target.
The story continues
“This is a positive for the stock market,” John Stoltzfus, chief investment strategist at Oppenheimer, said on Yahoo Finance’s Morning Brief on Tuesday morning. “It releases some of the gloom that’s been hanging over the stock market.” [the market] “I have to think that this will give the Fed an opportunity to start cutting interest rates early this month.”
Inflation is running above the Federal Reserve’s 2% annual target, but recent economic data, including the July jobs report that sparked the sell-off, are fueling the view that the central bank should cut interest rates sooner rather than later.
Notably, the Fed’s preferred inflation measure, the so-called core PCE price index, showed inflation was unchanged in June from the previous month, and that the annual rate of increase in core PCE was the slowest in more than three years.
As of Tuesday, the market was pricing in a nearly 100% chance that the Fed would cut interest rates by the end of its September meeting. But the odds of a 50 basis point cut and a 25 basis point cut that traders predicted last week were roughly 60/40, but are now split 50/50, according to the CME FedWatch tool.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her at Yahoo Finance. Translatorvisit me on LinkedIn or email me at alexandra.canal@yahoofinance.com.
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