The latest inflation data could be a bit misleading to the untrained eye. But “don’t be fooled by the uptick,” said Julia Pollak, ZipRecruiter’s chief economist. “Inflation is slowing, and doing so across a broader range of goods and services.”
Headline inflation rose from 3% in June to 3.2% last month, the Bureau of Labor Statistics (BLS) reported Thursday. But the rise was partly caused by changing year-over-year comparisons, and monthly data showed inflationary pressures are stabilizing.
Pollak noted that if you annualized the latest inflation data instead of comparing it with last year, when inflation hit a four-decade high, it looks far less intimidating. In July, inflation was 2.52% on a six-month annualized basis and just 1.89% on a three-month annualized basis, she noted. That’s right around the Fed’s 2% target rate.
Backing up that view was Rick Rieder, BlackRock’s CIO of global fixed income and head of the BlackRock global allocation investment team.
“Today’s CPI [consumer price index] data depicted continued softening in the elevated inflation levels we have witnessed over the past couple of years,” he said, adding that “it’s not just encouraging that today’s report was softer, but also that the three- and six-month trends of these inflationary indicators are decisively lower.”
Core inflation—which excludes more volatile food and energy prices and is often seen as a stronger indicator of true underlying inflation—also rose just 0.2% for the second straight month in July, marking the smallest back-to-back gain in the measure in over two years. Year-over-year core inflation remained elevated at 4.7%, again in part owing to base effects, but the trend there was “encouraging” as well, Pollak said.
“Wage growth continues to outpace inflation,” she added. “As workers see their purchasing power improve, expect to see consumer spending continue to grow and the labor market continue to be resilient.”
For BlackRock’s Rieder, the current inflationary trend should be “encouraging to consumers, as well as to Federal Reserve policymakers.” Fed officials have raised interest rates to a 22-year high in their attempt to quash inflation since March of last year, leading to a flood of recession predictions from Wall Street. But with underlying inflationary pressures fading, Chair Jerome Powell and company may be nearing the end of the painful rate hiking process.
“We remember last year’s soaring prices like they were yesterday, and consequently the Fed will not cut interest rates for a while, but hopefully the central bank can stay on hold for an extended period of time, before presumably starting to cut rates later in 2024, as today’s high prices become merely stable over the coming months and quarters,” Rieder said.
A boost for the soft landing narrative
Pollak and Rieder aren’t the only ones who saw the bright side of the latest inflation report. Investors celebrated the data on Thursday, with the S&P 500 rising 0.6% by midday. And Charlie Ripley, a senior investment strategist at Allianz Investment Management, argued that the inflation data showed “the soft landing narrative”—that idea that inflation can fade without the need for the Fed to create a job-killing recession—continues to gain traction.
Several price categories that had worried economists and the Fed continued to fall in July, including airfare, which sank for the fourth consecutive month, this time by 8.1% month over month, and used cars and trucks, which dropped 5.6% from a year ago.
“A building trend of disinflation will certainly be welcomed by the Fed as they prepare for a policy decision at the September meeting,” Ripley said, arguing “the case continues to build” for the end of the interest rate hiking cycle.
George Mateyo, CIO at Key Private Bank, which manages $50.2 billion, said that July’s consumer price index data was even “reminiscent of the good old days” before the pandemic, when inflation was far from a problem.
“In 2019, the average monthly increase in inflation was 0.2%, and that’s what we’ve experienced in the past two months in 2023,” he noted. “The Fed, therefore, might feel as if they’ve ‘stuck the landing’ and can pause as planned and not raise interest rates in September.”
‘Grounds for caution’ amid inflation’s last stand
While there were a number of positive signs in the latest consumer price index data, some economists are still worried that inflation could become “sticky.”
Brian Coulton, chief economist at Fitch Ratings, said that although the slowdown in core inflation is clearly “good news,” the CPI report wasn’t all positive.
“The pickup in core services inflation to 0.4% month over month from 0.3% in June will be seen by the Fed as grounds for caution,” he warned. “Rents just don’t seem to be slowing by much at all on a month-over-month basis and, given the 34% weight of shelter in the CPI, this is significant.”
To Coulton’s point, the index for shelter accounted for over 90% of the increase in inflation last month, according to the BLS. Rent prices have continued to rise throughout the year, even as the average sales price for U.S. homes declined for the second straight quarter over the summer.
Morning Consult chief economist John Leer also said that shelter inflation could accelerate by the end of the year. He warned that demand for housing remains “resilient” as the chronic undersupply of homes in the U.S. is overpowering the cooling effect of higher rents and mortgage rates.
“While core CPI is showing signs of slower trend growth, future progress in the fight against inflation will be harder, not easier,” he said. “The longer inflation remains elevated, the more entrenched it becomes. The question we should all be asking is how long the Fed is willing to accept core inflation above 4%. My sense is that their tolerance is pretty low, meaning that we shouldn’t expect rate cuts this year.”
