One month does not make a trend, but inflation did indeed moderate in July.
The consumer price index rose 8.5% year-over-year – after jumping a scorching 9.1% in June – and was unchanged on a month-to-month basis. Core CPI, which strips out volatile food and energy components, rose 5.9% from a year ago and just 0.3% vs. June.
Both the headline and core inflation readings came in blessedly below forecast. But although the data offer a welcome respite for consumers – not to mention the Federal Reserve's interest-rate setting committee – experts are split on where consumer prices and Fed policy goes from here.
In order to get a sense of what economists and market strategists are thinking about these latest developments, we've excerpted some of their commentary on the July CPI report below:
- "The July CPI report is a welcome relief for the economy. Markets seem to agree, based on the initial positive response of risk assets to the report. The Fed's forecast of a soft landing would be greatly improved if we see continued declines in core goods – particularly durables such as new and used cars and household furnishings –and a further slowdown in shelter inflation. We think this report is consistent with our forecast of a 50-basis-point [a basis point is one-one hundredth of a percentage point] hike in September. This morning's data confirms that we have seen a peak in inflation and endorses our view that peak Fed hawkishness is likely behind us." – Aditya Bhave, U.S. and global economist at BofA Securities
- "Unlike the previous two CPI reports, today's CPI release provides some welcome news for members of the FOMC. That said, monetary policymakers have made clear that they need to see clear evidence of a sustained slowdown in inflation before pivoting on monetary policy. To that end, core CPI is still up 5.9% year-over-year and has grown at a 6.8% annualized pace over the past three months. In our view, it will take several more soft inflation prints before the FOMC begins to feel confident that it is getting price pressures in check. At least a 50-basis-point (bp) rate hike at the September FOMC meeting remains the most likely outcome." – Sarah House, senior economist at Wells Fargo Economics
- "July core CPI rose by 0.31% month-over-month, below expectations and the slowest monthly pace since September. Declines in airfares and used car prices contributed to the slowdown, and we also note a sequentially slower but still elevated pace of shelter inflation. Headline CPI was unchanged, with the year-on-year rate falling 0.6 percentage point to 8.5% on lower gasoline prices." – Jan Hatzius, chief economist, Global Investment Research Division at Goldman Sachs
- "Inflation softened more than expected after months of upside surprises, led primarily by weaker core price pressures. This was driven by deflation in used cars, airline fares, and lodging, while shelter inflation held firm. Although the move is in the right direction, it is too early to say if the trend will be sustained. Today's inflation report increases the probability of a 50bp hike at the September meeting, which remains our baseline. However, a 75bp hike remains on the table, given that the Fed will have several more data points in hand, including new employment and CPI reports, before the decision." – Pooja Sriram, U.S. economist at Barclays Investment Bank
- "While the headline inflation data today moderated a bit on the back of falling gasoline prices, it's still running at a worryingly high rate. Over time, we think the slowdown in economic growth (globally), the continuation of the Federal Reserve's assertive hiking cycle and the possibility of resolution with several persistent supply chain issues should influence broad inflation lower. Still, while Core PCE inflation (the Fed's favored measure) is likely to moderate in the coming months, it will still remain well-above the Fed's 2% inflation target. The persistence of still solid inflation data witnessed today, when combined with last week's strong labor market data, and perhaps especially the still solid wage gains, places Fed policymakers firmly on the path toward continuation of aggressive tightening. Indeed, we believe it's quite likely that the FOMC will raise policy rates another 75 basis points at the September 21 meeting, the third such substantial hike in a row." – Rick Rieder, BlackRock's chief investment officer of Global Fixed Income and head of the BlackRock's Global Allocation Investment Team
- "Markets are enjoying the CPI report suggesting that inflationary pressures are easing, and the trajectory is moving in the right direction. With this CPI print, equity markets, already overbought, can certainly take a sigh of relief, but it still doesn't answer the question as to whether THE 'bottom' is in. Still, the lower than consensus estimate for headline inflation is undeniably good news for markets and consumers alike." – Quincy Krosby, chief global strategist at LPL Financial
- "The July CPI report might be the first clear indication that consumers are pushing back against high inflation in response to tighter monetary policy. It's a sign that inflation is close to peaking, though the climb down the mountain will be slow due to rising wages and rents. The report will go some way to offsetting the impact of the strong July jobs report in the Fed's eyes, though policymakers will need to see more convincing evidence that inflation is heading toward the 2% target. The Fed will see one more jobs report and another CPI release before the September 20 to 21 meeting. For now, we lean toward a 50-basis-point (bp) rate hike in the face of weaker economic data and some moderation in consumers' long-run inflation expectations." – Sal Guatieri, senior economist at BMO Capital Markets
- "The decline in Inflation, which peaked a few months ago, is now showing up in the headline data in a meaningful way. The Fed now has plenty of cover to reduce the pace and size of future rate hikes. This is really good news and decreases the odds of stagflations and the need for a big recession to break the back of embedded inflation." – Jamie Cox, managing partner at Harris Financial Group
- "The bond market loves the number, and for a good reason. The inflation rate is still elevated at +8.5% YoY from +9.1% in June; the core inflation rate stayed at +5.9%, but that is still off the +6.5% March peak (and the consensus had been looking at a bump to +6.1%). Many goods items related to the dollar (appliances, apparel) declined, and we saw big relief in the airlines, used vehicles, rental cars, and education/communications. The price softness was breathtakingly broadly based. Excluding shelter, CPI was -0.3%, and this has not happened since May 2020." – David Rosenberg, founder and president of Rosenberg Research
- "Headline CPI decelerated in July as gas prices declined, giving consumers some relief at the pump. Declining retail gas prices will likely give a much-needed boost to consumer confidence. Consumers feel the nagging pressures from rising shelter and food prices. Rising rental costs are especially troublesome. We could see rising rents continue in the near future as would-be home buyers recalibrate amid rising borrowing costs. Transportation costs declined over 2% from a month ago, perhaps a sign of cooling demand for travel. The Fed will have another inflation report before September's FOMC meeting and if August's inflation report is as good as this one, we could expect a 50 basis point hike instead of a more aggressive increase in rates." – Jeffrey Roach, chief economist at LPL Financial
- "If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening and if the market starts to price in fewer rate hikes, we expect the yield curve to steepen. While the Fed has hiked interest rates by 225 bps already this year, the market is pricing in an additional 117 bps of hikes still to come in 2022." – Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)
- "July finally saw some good news for consumer prices, and not just with lower gas prices. The big runup in retailers' inventories since late 2021 is translating into more discounting for consumers. With the economy much cooler than in 2021, inventory levels higher, and gas prices down in the first ten days of August, inflation is probably past the peak. However, the U.S. is at risk of another surge in utility prices this coming winter if Europe suffers an energy shortage, which currently seems quite likely – British natural gas futures and German electricity futures are pricing in surges to prices that matched last winter's highs. Another tough winter heating season could hit consumers harder than last year's, since many households have spent down the financial cushions they built up during the pandemic. Inflation is likely to be stuck above 5% through the winter as utility prices stay high and global supplies of petroleum products stay tight." – Bill Adams, chief economist for Comerica Bank
- "The market seems to be taking comfort in the fact that we're seemingly past peak inflation and we should continue to see declines in the second half of the year. It looks like the odds of another 75 basis point hike by the Fed have dipped significantly in the wake of this report and we could only see a 50 basis point hike at the next meeting. If energy prices continue to fall, then I expect that we'll see inflationary data coming down in future months. This dynamic should support risk assets and we will likely see long term interest rates fall as well." – Brian Price, head of investment management for Commonwealth Financial Network
- "As we've said all year, the Fed has its back against the wall and gets let up (on raising interest rates) until inflation starts coming back down. One month doesn't make a trend, but at least headline is coming down and core stopped going up. If we see future months' data showing a decrease in inflation, then it will help markets see the end of the tunnel in terms of rate hikes." – Chris Zaccarelli, chief investment officer at Independent Advisor Alliance
Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
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