Core #CPI surprised to the upside, driving a solid gain in headline #inflation as well. The strength in the July report was driven by components impacted by #Covid unwinding some of their previous large declines and bouncing back from depressed levels.
We saw solid gains in transportation services components, such as #airfares, motor vehicle #insurance and rental #cars, which reflect that bounce back.
The #monetary and #fiscal policy responses to the crisis have credibly bridged the #economic gap caused by the unprecedented lockdowns, yet as #inflation deficiencies were already present pre-Covid, it’s likely that #policy will need to remain supportive for some time.
Many commentators argue that heightened policy #liquidity could result in a dramatic acceleration of #inflation, which could then take #MonetaryPolicy off its near-to-medium-term path, but we suggest that the historical evidence does not bear that out.
In our view, the key to near-term #monetary policy will be all about the @federalreserve’s urgent attempts to support #labor#market recovery to the greatest possible extent, but how far the central bank will be willing to go will largely depend on #inflation remaining contained.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
As we have argued in recent months, a great deal of progress has been made in combatting high levels of post-pandemic inflation. Still, the likelihood is that most of the meaningful progress is behind us at this stage, and inflation may remain sticky at levels higher than the @federalreserve would ideally like.
Indeed, yesterday’s headline CPI increased 0.39% month-over-month, greater than its gains from last month, largely due to energy price gains. That resulted in headline CPI rising to 2.89%, from 2.75% the month prior, on a year-over-year basis, amid unfavorable base effects.
The core CPI measure gained 0.23% month-over-month, and 3.24% year-over-year. Taking a step back to provide some context, the average annual rate of core CPI inflation from 2000 through 2023 was 2.37%, but for 2024 this measure resided at 3.24%, illustrating vividly why the #Fed wants to see further progress on #inflation.
What a way to kick off 2025!
Last Friday’s #JobsReport gave us more revealing data on the status of the jobs market in the U.S. at this stage, and it certainly continued to describe an economy in very healthy shape.
The evolution of hiring conditions is something that we are very focused upon, and we will continue to be so over the coming weeks and months. With a new Administration coming in, policies such as immigration reform, government hiring (or closures and layoffs), and incentives to spend more aggressively in places like in energy, will influence the ‘to and fro’ of job-demand in the country.
And furthermore, the @federalreserve has cited- almost as perquisite- that softness in labor conditions would have to be in place to continue to move the Fed Funds policy rate to lower levels, and we didn’t see a lot of motivation for in this data.
Yesterday’s @federalreserve move signals something of an ending to a story that has played out for several months now, in terms of the Fed’s rate cutting cycle, associated with what were significantly restrictive interest rates.
The #FOMC cut policy interest rates by a quarter-point, to the 4.25% to 4.50% range, and communicated more #hawkishly through the updated dot plot/Summary of Economic Projections (SEP), as well as during the Chair’s press conference. To us, this suggests that we’ve entered a new phase of the rate cutting cycle.
We have often argued that the more elevated Funds rate creates great pressure on lower income cohorts through the housing, credit card, and auto finance channels than is worthwhile at this stage, particularly given where inflation has decelerated to.
As usual, today’s #CPI report created great anticipation and then introspection upon its release. It’s always amazing that a few basis points (bps), one way or the other, can have such a large impact on market perception, and presumably on the interpretation of how the @federalreserve will react to such a number.
The truth, however, is that the #Fed considers a multitude of #inflation readings, with a higher emphasis on the Core PCE measure. Yet, we find ourselves at a point in time where the range of outcomes for inflation related to recently solid economic growth, to newly elected political officials, and to the consequential potential for higher tariffs and higher levels of growth, etc., has led to an enormous focus on this number.
To that end, today’s report showed still firm inflation readings of 0.28% month-over-month, and 3.33% year-over-year for Core CPI (which excludes the volatile food and energy components) and 0.24% and 2.60% for headline CPI, over the same time periods.
Upon reflection, last week’s #JobsReport was, as always, interesting and helpful for understanding where employment currently stands, which is at the top of the priority list for the @federalreserve.
However, the data is also challenging to interpret, in terms of true job growth, given distortions from recent hurricanes in the southeast of the U.S., labor strikes in the Pacific Northwest, and the uncertain impact of these events.
Moreover, this payroll report occurred right in the middle of some major economic and market-moving events, such as the U.S. elections, the announcement of the U.K. budget, major tech and other corporate earnings, the onslaught of other economic data, and this week’s #FOMC meeting.
Call it the Couldn’t Possibly Ignore report. That’s how important CPI has been in the past few years, as it has kept markets on edge as to what it means for Federal Reserve policy and interest rates across the curve.
It’s still important, but the Fed’s clear focus has shifted toward more balanced priorities, with considerably more emphasis on the labor market for judging how quickly (if at all) to move the Fed funds rate.
In today’s data, Core CPI (excluding volatile food and energy components) printed at 0.31% month-over-month and 3.31% year-over-year.