US CPI for July: nothing much to see here

Data released by the BLS this morning show that US headline CPI rose 3.2 percent year-on-year in July, up from a 3.0 percent increase in June. This marked the first time the headline index has ticked up since this time last year, but the data do not represent any change in the underlying downward trend in inflation. Rather, the number serves to underline the fact that the so-called base effect is now played out. The outsized monthly CPI increases seen in late 2021 and early 2022 are now fully out of the yearly index, which now more accurately reflects the current inflation picture.

On a month-to-month basis, headline CPI rose 0.2 percent in July, the same pace as in June. The sub-index for shelter costs accounted for fully 90 percent of the monthly increase; that sub-index is, of course, heavily influenced by the Fed's rate hikes. Core CPI, excluding food and energy, rose 4.7 percent in July from a year earlier,  still well above the Fed's 2 percent target.  However, the monthly increase in this measure was 0.2 percent, the same as in June. The annualized rate of growth in both headline and core CPI thus seems to be running only slightly above the target rate.

All in all, today's data should give the Fed room to keep rate on hold at the September FOMC meeting, and it is quite conceivable that the current tightening cycle has reached its peak. Talk of rate cuts is certainly premature, but it is likely that year-on-year CPI will consistently have a 2-"handle" by the end of this year. 

UPDATE, August 11: Producer price index (PPI) data released today by the BLS are slightly less encouraging than the CPI data. PPI rose a higher-than-expected 0.3 percent in July, the biggest monthly gain since the start of 2023. Still, the year-on-year increase is well below the rise in CPI -- and the Fed's inflation target -- at 0.8 percent.  The most concerning aspect of the report for Fed policymakers is likely to be the fact that prices for services rose 0.5 percent in the month, as opposed to a rise of only 0.1 percent in goods prices. It is difficult to blame higher service prices on international supply shocks.