July inflation about as expected – good enough for the Fed to ease in September.
The July CPI rose by 0.2 percent, meeting market expectations. The core CPI (removing the volatile food and energy components) also increased by 0.2 percent (equal to market expectations). As has been the case for a while, goods inflation was negative again while services inflation was positive.
After a one-month slowdown in shelter inflation in June (up by 0.2 percent), shelter prices rebounded by 0.4 percent. The BLS noted that the shelter increase accounted for 90 percent of the overall increase. Reflecting the impact of continued outsized increases in the shelter component, the “super core” inflation rate (core inflation less shelter) was unchanged for a third consecutive month. Looking at the 12-month trend rates, the overall CPI was up by 2.9 percent, while the core CPI increased by 3.2 percent. These compare with the Fed’s longer-term goal of 2.0 percent inflation (albeit with the broader PCE price index, which shows trend inflation at about 0.5 percentage points lower).
What are the implications for Fed policy as a result of today’s release?
The Fed’s dual mandate is for stable prices (which the Fed defines as 2.0 percent inflation) and the lowest unemployment consistent with those stable prices. Unfortunately, the Fed has only one policy instrument to deal with two targets, which makes hitting both difficult. Inflation continues to slowly edge lower, moving incrementally closer to the 2.0 percent goal, while there is evidence that the labor market is slowing (the U-3 unemployment rate, while still low, is clearly moving higher). According to the CME Group’s FedWatch tool, there is a 100 percent chance that the Fed will ease at the September FOMC meeting – with a 57 percent probability of a 25 basis point cut and a 43 percent probability of a 50 basis point cut. The Fed will get the PCE inflation and the August employment reports before the next FOMC meeting, and these will be key inputs into whether the Fed moves by 25 or 50 basis points.
Our view remains that the Fed is more likely to ease by 25 basis points at the September FOMC meeting, but that this will be the first in a series of easing moves by the Fed as the economy cools and inflation slips slowly lower – encouraging the Fed to move in a measured way toward a more neutral stance of monetary policy from the very easy stance today. Unless the economic data show more weakness than we expect, our view is that the Fed will ease by a total of 75 basis points by year-end (25 basis point cuts at all three of the remaining 2024 FOMC meetings) – with at least another 100-150 basis points in cuts coming next year.
David W. Berson, Ph.D.
Chief US Economist
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