July's CPI Report Cements US Positivity on Inflation

Shelter was by far the largest contributor to the monthly rise in prices, accounting for over 90% of the total increase

Lauren Solberg 11 August, 2023 | 10:54AM
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US Economy

The July Consumer Price Index report provided more good news on inflation, reaffirming the effect of easing upward pressures on prices this year.

The exception to this rosier picture is the cost of housing, which remains elevated. But economists say the overall situation should continue to improve, helping bring inflation down closer to the Federal Reserve’s target. Against this backdrop, it is widely believed that the Fed will keep rates steady (albeit at a high level) for the rest of 2023.

The Bureau of Labor Statistics reported that the CPI rose 3.2% in July from year-ago levels – a slight increase from June’s 3.0%, but well below last summer’s peak of 9.1%. Core CPI, which excludes volatile food and energy costs, rose 4.7% over the last 12 months after rising 4.8% in June. This latest reading came in line with economist forecasts.

The CPI rose 0.2% in July from month-ago levels, as it did in June. Core CPI also rose 0.2%, matching both the June increase and economist forecasts. This was the second consecutive month during which both headline and core inflation posted increases of only 0.2%

Line chart showing year-over-year changes in headline and core CPI.shelter was by far the largest contributor to the monthly rise in prices, accounting for over 90% of the total increase. Still, for the first three months of the year, shelter posted an average monthly increase of 0.7%; that figure has been less than 0.5% for the past three months. Motor vehicle insurance prices also made an outsized contribution.

Food prices rose 0.2% in July after increasing 0.1% in June. Food-at-home prices rose 0.3% over the month, while food-away-from-home (restaurant) prices rose 0.2%. Energy prices rose 0.1%.

Shelter Prices Are Keeping Inflation Elevated

In July, shelter prices rose 0.4% after increasing by the same amount in June. Vehicle prices fell, as the index for used cars and trucks declined by 1.3% and the new vehicles index fell by 0.1%.

Energy prices were mixed over the month, up 0.1% overall after rising 0.6% the prior month. Utility (piped) gas service prices gained 2.0%, fuel oil prices rose 3.0%, gasoline prices rose 0.2%, and electricity prices declined 0.7%.

Markets See No Fed Rate Hike In September

Currently, 90.5% of participants in the bond market expect the Fed to maintain its target range of 5.25%-5.50% for the federal-funds effective rate at its September meeting, according to the CME FedWatch Tool as of 9 a.m. Eastern time.

These expectations have strengthened from a month ago, when 72.4% of respondents expected the September target rate range to stay at 5.25%-5.50%. Additionally, 22.3% predicted the rate reaching a higher range of 5.50%-5.75%.

Will the Fed Pause Rate Hikes Beyond September?

Looking ahead to the end of the year, participants are split on whether the Fed will hold interest rates steady. The majority (67.2%) currently predict the Fed will keep the rate at current levels through year-end, while 22.4% expect it to raise them by an additional quarter-point to a target of 5.50%-5.75%. Just 8.8% expect the Fed to pivot to lowering rates to 5.00%-5.25% in that time frame.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Lauren Solberg  is a data journalist at Morningstar

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