CPI Inflation Rate Is Expected To Rise In July. Why The Federal Reserve Won’t Care.

The consumer price index, due out from the Labor Department early Thursday, should show just a modest monthly gain in July, even as the annual CPI inflation rate moves higher. Core CPI prices also are expected to be relatively tame, with the yearly increase set to stay stubbornly high. But the inflation figures aren’t expected to alter Federal Reserve policy.


The S&P 500 has been pulling back ahead of the CPI inflation report, but still near 52-week highs.

CPI Inflation Forecasts

Economists expect July’s CPI to climb 0.2% vs. the prior month, after a similar gain in June. Core CPI, which excludes food and energy, also should rise 0.2% vs. June.

The annual CPI inflation rate, however, is expected to pick up to 3.3% from June’s 3%. That reflects flat prices in July 2022. The core inflation is seen holding at 4.8%.

The average hourly wage rose a solid 4.4% in June vs. a year earlier. But the latest IBD/TIPP Poll finds that just 16% of adults say their wages have kept pace with inflation, the lowest since at least February 2022. Some 58% say they haven’t kept up. That’s vs. 20%-55% in July.

Some of that increased sense of falling behind likely reflects rebounding gasoline prices. Prices at the pump are still down vs. a year earlier, but up significantly in the past several weeks.

Fed Policy Impact

Barring a surprisingly strong CPI inflation report, the Fed policy impact may be minimal.

First, policymakers know that a higher July CPI inflation rate will largely reflect tough year-earlier comparisons, not a reacceleration of price pressures broadly.

Second, Fed officials have signaled they are near the end of rate hikes, taking a wait-and-see approach.

After a pause in June, policymakers hiked rates by a quarter-point at the July 25-26 Fed meeting. Fed chief Jerome Powell said the late September meeting would be “live,” meaning a rate hike was possible, but he gave hints that the central bank would take no action, noting that the inflation-growth risks are “balanced.”

Since then, policymakers have given some mixed signals since the July Fed meeting, but generally have signaled patience.

Philly Fed President Patrick Harker, who’s a voting member this year, said Tuesday, “I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.”

Markets see just a 13% chance of another rate hike at the Sept. 20 meeting, rising to just over 30% by the Nov. 1 meeting. The odds have trended lower over the past week.

By that Nov. 1 meeting, Fed officials will have CPI inflation and jobs reports through September, as well as the first reading for third-quarter GDP growth.

Investor Sentiment Sours As Economic Optimism Index Hits One-Year Low

S&P 500 Reaction To CPI Report

The S&P 500 has rallied 16.4% year to date through Wednesday, despite the recent pullback.

The 10-year Treasury edged down to 4.01% on Wednesday, ahead of the CPI inflation report. The benchmark yield surged to a 2023 high of 4.21% intraday on Aug. 4 before pulling back sharply. But a higher 10-year yield reflects a surge in Treasury issuance and stronger economic growth. Short-term Treasury yields, more closely tied to Fed policy, have fallen or held steady in the past few weeks.

On Friday, the Labor Department will release the July producer price index. Economists expect the PPI and core PPI to show a 0.2% monthly gain. The PPI inflation rate should rise to 0.7% from 0.1%, while the core PPI inflation rate dips to 2.3% from 2.4%.

Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.

Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.


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