CPI inflation is expected to pick up in July. Why doesn’t the Fed care?

The Consumer Price Index, due for release from the Labor Department early Thursday, should show modest monthly gains in July, even as annualized CPI inflation rose. Core CPI prices are also expected to be relatively low, with a continuation of their annual increase. But the inflation figures are not expected to change Fed policy.

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The S&P 500 was falling ahead of the CPI inflation report, but it’s still near 52-week highs.

CPI inflation expectations

Economists expect the consumer price index for July to rise 0.2% from the previous month, after a similar rise in June. Core CPI, which excludes food and energy, should also rise 0.2% versus June.

However, annual CPI inflation is expected to pick up to 3.3% from 3% in June. This reflects price stability in July 2022. Core inflation is expected to remain at 4.8%.

Average hourly earnings increased 4.4% in June compared to the year before. But the latest IBD/TIPP survey found that only 16% of adults say their wages are keeping up with inflation, the lowest level since at least February 2022. And about 58% say they haven’t kept up. This is up from 20%-55% in July.

This growing sense of being left behind likely reflects the recovery in gasoline prices. Prices at the pump are still down from a year ago, but have gone up significantly in the past several weeks.

The impact of Federal Reserve policy

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

First, policymakers know that higher July CPI inflation will largely reflect tough comparisons compared to the previous year, not a broad-based re-acceleration of price pressures.

Second, Fed officials have indicated that they are nearing the end of a rate hike, taking a wait-and-see approach.

After a pause in June, policymakers raised interest rates by a quarter point at the Federal Reserve meeting on July 25-26. Fed Chairman Jerome Powell said the late September meeting would be “live,” meaning a rate hike is possible, but gave hints that the central bank would not take action, noting that inflation risks are “balanced.”

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

Philly Fed Chairman Patrick Harker said on Tuesday, “I think we may be at a point where we can be patient and keep interest rates steady and let the monetary policy measures that we’ve taken do their work.”

Markets see only a 13% chance of another rate hike at the September 20th meeting, rising to just over 30% by the November 1st meeting. The odds have trended downward over the past week.

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

Investor sentiment deteriorated as the economic optimism index hit its lowest level in one year

S&P 500 reaction to the CPI report

The S&P 500 is up 17.2% year over year through Tuesday, despite the recent pullback.

The 10-year Treasury note was trading at 4.02% on Wednesday afternoon, ahead of the release of the Consumer Price Index inflation report. The benchmark yield rose to a 2023 high of 4.21% on the day on Aug. 4 before easing sharply. But a higher 10-year yield reflects an increase in treasury issues and stronger economic growth. Short-term Treasury yields, which are closely linked to Fed policy, have fallen or remained flat in the past few weeks.

On Friday, the Labor Department will release the Producer Price Index for July. Economists expect the PPI and core PPI to show a monthly gain of 0.2%. PPI inflation should rise to 0.7% from 0.1%, while core PPI inflation should fall to 2.3% from 2.4%.

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