The Federal Reserve was concerned that low inflation for June was a single datapoint, now July’s report offers similar evidence of disinflation. Monthly prices for the month of July rose 0.2% for both the headline and core inflation series, the same as for the month of June. Headline annual inflation rose slightly at 3.2% and core annual inflation showed some disinflation 4.7%. The Fed will still be concerned that annual 4.7% core inflation is well above their 2% goal, but it has now trended consistently lower since April. There will be another CPI release for the month of August before the Fed is scheduled to meet again in September, but the latest CPI report is broadly encouraging and at the margin, may cause the Fed to be less committed to another 2023 interest rate hike.
Housing
Housing is now the main driver of rising inflation because it carries a large weight in the series. Similar to the prior month shelter costs rose at a 0.4% monthly rate, but that is the same level as June and consistent with disinflation in housing costs.
Prices continue to fall in certain categories. Prices for both new and used cars declined in July as did prices for many other physical goods from shoes to furniture.
Services Costs
The Fed is watching services costs closely. There is concern that these prices continue to rise following higher wages, which are a primary cost for many services. In addition to shelter costs increasing at a slower rate than for some earlier months of 2023, there were some signs of other services costs starting to ease. Medical services declined driven by falling health insurance and hospital costs. Airfares and certain financial services also fell in price. However, in part due to the large weight to shelter costs, services costs continued to move higher overall.
The Fed’s Next Meeting
The Fed will set short-term interest rates on September 20. This CPI report will be relatively encouraging for that discussion. However, there will be one more CPI report before the Fed meets, and core inflation remains well above the Fed’s 2% goal.
If next month’s CPI report offers more evidence of disinflation then the Fed may be inclined to be a little less aggressive on interest rates. However, for now the prospect of another interest rate increase in 2023 remains something that the Fed is considering. It’s possible this CPI report softens that position.
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