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US CPI Inflation Surge at 3.2% Below Forecast, Markets React Positively
On Thursday, August 10, 2023, the Bureau of Labor Statistics reported the US CPI data for the month of July at 3.2% showing clear signs of receding inflation numbers. Also, the annual inflation rate was below the 3.3% forecast.
However, it was still higher than the month of June, and the first increase in more than a year’s time. Excluding the volatile prices of food and energy, the core Consumer Price Index (CPI) also rose by 0.2% in the month. This was in alignment with expectations and resulted in a year-over-year rate of 4.7%, marking the lowest level since October 2021. The annual rate for the core CPI was slightly below the Dow Jones consensus estimate of 4.8%.
Markets reacted positively with Dow Jones futures shooting up by 200 points and Treasury yields moving lower. Sung Won Sohn, chief economist at SS Economics said:
“It is not quite ‘mission accomplished’ yet, but significant progress on the inflation front has been made. On balance, the inflation picture has improved significantly. The Federal Reserve will stop raising the interest rate soon.”
Sectors Affecting US CPI Inflation Data
The majority of the monthly increase in inflation was due to higher shelter costs, which experienced a 0.4% rise, resulting in a 7.7% increase over the past year. Within the shelter category, rents also rose by 0.4%. This category accounted for over 90% of the overall increase and holds about one-third of the CPI weighting.
Food prices saw a 0.2% increase during the month, while energy prices only rose by 0.1%, despite notable surges in crude oil prices and pump prices.
Prices for used vehicles declined by 1.3%, while medical care services experienced a 0.4% decrease. Airline fares, which had seen a substantial surge during the early days of the Covid pandemic, fell by 8.1% in the month. This is the same decrease as in June, thus resulting in an overall decline of 18.6% from a year ago.
The Fight Against Inflation Continues
Collectively, the most recent set of data demonstrates that although inflation has significantly decreased from its peak in mid-2022, it remains notably higher than the Federal Reserve’s desired 2% threshold. This level of inflation makes it unlikely that there will be any interest rate cuts in the near future.
However, the decelerating inflation levels are taking off some pressure from the Fed. Seema Shah, chief global strategist at Principal Asset Management said:
“While inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates. Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view.”
The increased interest rates have yet to impact economic growth significantly: GDP recorded growth of 2% and 2.4% in the first two quarters of 2023, while the Atlanta Fed forecasts a third-quarter growth rate of 4.1%. Although payroll gains have slowed down, they remain robust, and unemployment is at its lowest level since late 1969.
Having raised benchmark interest rates 11 times since March 2022, central bank officials are widely anticipated to pause in September. However, there is an ongoing debate about the next course of action. Policymakers have expressed varying opinions in public comments leading to confusion.
US CPI Inflation Surge at 3.2% Below Forecast, Markets React Positively
