The core inflation rate, which eliminates the volatile food and energy sector, stayed unchanged at 5.9 percent last month. Economists expected core inflation to rise to 6.1 percent.
On a monthly basis, the CPI was flat, and the core CPI edged up 0.3 percent.
Despite the notable decline in the headline print, everything was still up from the same time a year ago as inflation remained at a 40-year high. Food prices advanced 10.9 percent, energy prices climbed to 32.9 percent, new vehicles rose 10.4 percent, used cars and trucks jumped 6.6 percent, and apparel rose 5.1 percent.
The shelter index also rose 5.7 percent, while medical care and transportation services picked up 9.2 percent and 5.1 percent, respectively.
The drop came on the energy front, with gasoline sliding 7.7 percent month-over-month and fuel oil declining 11 percent from June to July. However, even with the substantial decline in energy prices, they were significantly high year-over-year.
The cost of food remained significantly high in July compared to a year ago, with ground beef up 9.7 percent, chicken up 16.6 percent, and ham up 9.2 percent. Other kitchen staples also advanced, such as eggs (38 percent), milk (15.6 percent), bread (13.7 percent), coffee (20.3 percent), and butter (22.2 percent).
According to EJ Antoni, a research fellow at The Heritage Foundation, the July inflation report is far from optimistic.
“Energy prices dropped slightly in July as consumer demand collapsed from record prices in June, but the cold reality is that whether the rate is 8.5% or 9.1%, Americans are feeling historic pain whenever they buy gas, groceries, or other staples—and we’re still moving in the wrong direction,” he said in an email.
For some market observers, the concern is that the CPI is sticky and will remain elevated for longer than expected, says Giuseppe Sette, the president of Toggle AI, an investment research firm.
“If you imagine 5 percent as a sticky anchor for inflation, then it will be reasonable to expect short term rates to get closer to 5 percent during next year,” he said in a note. “Now whether the economy can take it is a different story. We’ll certainly face stress in the credit system with higher rates and Quantitative Tightening.”
Meanwhile, the financial markets soared in pre-market trading on the news, with the Dow Jones Industrial Average rallying 400 points. The Nasdaq Composite Index climbed close to 300 points, while the S&P 500 jumped about 1.6 percent.
Investors believe that the lower-than-expected headline reading might force the Federal Reserve to pivot on interest rates and proceed to slow down the pace of rate hikes.
Inflation Fueling Recession Fears
Inflation continues to be consumers’ chief concern in today’s economy.
The IBD/TIPP Economic Optimism Index in the United States slipped to an 11-year low of 38.1 in August, down from 38.5 in July. Consumers remained pessimistic about the economy based on inflation canceling wage gains.
“With more Americans believing we’re in a recession than in months past, federal policies are the thorn in their sides,” said Raghavan Mayur, president of TechnoMetrica, who directed the poll, in a statement. “The economy is a top issue for 56% of people, and inflation continues to be troublesome to the majority of Americans.”
However, the Federal Reserve Bank of New York’s (FRBNY) Survey of Consumer Expectations found that median one- and three-year inflation expectations declined to 6.2 percent and 3.2 percent, respectively, in July.
That said, negative sentiment was similar for companies, too. While the National Federation of Independent Business (NFIB) Optimism Index inched higher to 89.9 in July, which was still close to a decade low, the report noted that 37 percent of business owners listed inflation as their most important problem.
“The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages, and supply chain disruptions,” said William Dunkelberg, NFIB’s chief economist, in a statement. As we move into the second half of 2022, owners will continue to manage their businesses into a very uncertain future.”
Elevated inflation continues to add to growing recession fears. A recent Allianz Life Insurance Company of North America survey found that 66 percent of Americans are concerned that a significant recession is on the horizon, citing high inflation that will harm purchasing power over the next six months.
The poll also revealed that 82 percent of respondents believe inflation will worsen over the next 12 months. Plus, 71 percent noted that their wages are not keeping pace with growing expenses.
“Rising costs on necessities like food and gas are hitting Americans’ bank accounts,” said Kelly LaVigne, VP of Consumer Insights, Allianz Life. “Some might have dipped into their savings to cover those initial increases in the short term. But, as this drags on, the worry about how increasing inflation will affect purchasing power and saving in the long term is increasing.”
Meanwhile, the U.S. economy met the definition of a technical recession, recording two consecutive quarters of negative GDP growth.
What About the Federal Reserve?
The consensus among officials at the Federal Reserve is that the central bank will lift the benchmark fed funds rate and keep it intact until inflation pressures ease.
But voting members who sit on the Federal Open Market Committee (FOMC) echoed Chair Jerome Powell’s view that all policy moves will depend on the data.
San Francisco Fed Bank President Mary Daly told Reuters earlier this month that the institution would start at a 50-basis-point rate hike at the September meeting. However, if price inflation has yet to show signs of coming down at a notable pace, a three-quarter boost to interest rates would be appropriate.
Citigroup strategists led by Andrew Hollenhorst think that a full-percentage point increase is feasible following the red-hot July jobs report that saw 528,000 jobs returned to the national economy.
“Our base case remains for a 75 basis-point hike in September, but we would not be too surprised by a 100 basis-point hike if core inflation comes in stronger than expected,” Hollenhorst wrote.
The drop in the CPI “could cause the Fed to be less aggressive on a September increase,” Shmuel Shayowitz, the president and chief lending officer at Approved Funding, told The Epoch Times.
According to the CME Group FedWatch Tool, the financial markets are overwhelmingly anticipating a three-quarter-point hike. This would bring the target rate to 3 percent and 3.25 percent.
The FOMC’s next two-day policy meeting is scheduled for Sept. 20–21.
From The Epoch Times