CPI Inflation Rate Is Finally Falling — Much More Than Expected; Dow Jones Futures Jump

The CPI inflation rate finally pulled back from a 40-year peak in July, as the consumer price index came in cooler than expected. Even core inflation, which strips out food and energy prices, eased more than expected. Following the CPI report, which lowered odds of a big Federal Reserve rate hike, Dow Jones industrial average futures moved sharply higher.




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The CPI inflation rate eased to 8.5%, retreating from June’s 9.1% inflation rate amid falling gas prices, retail discounting, the return of online deflation and a plunge in shipping costs. Consumer demand has downshifted while Covid supply-chain snags are being ironed out. Economists expect another tame inflation reading for August ahead of the Fed’s pivotal Sept. 20-21 meeting.

The CPI was flat from the prior month, coming after June’s 1.3% jump. The core CPI rose 0.3% from June, while the annual core inflation rate held at 5.9%. March’s 6.5% core inflation rate was the highest since August 1982.

Wall Street economists expected the consumer price index to rise 0.2% in July, as the annual inflation rate eased to 8.7%. The core CPI was seen rising 0.5% on the month, after June’s 0.7% rise. The core inflation rate was expected to tick higher to 6.1% from 5.9%.

Goods Vs. Services Inflation

Inflation in goods prices, excluding food and energy, has decelerated from double-digit increases earlier in the year. Core goods prices rose 0.2% on the month, bringing the annual inflation rate down to 7% from 7.2% in June from 8.5% in May.

Inflation in nonenergy services prices, which affects 57% of consumer budgets, has yet to subside, rising 0.4% on the month and 5.5% from a year ago. That matched June’s 30-year high. Nonenergy services include big categories such as rent and medical services.

“Core goods inflation should also subside in the coming months given the overwhelming evidence of easing supply chain pressures,” Jefferies chief financial economist Aneta Markowska wrote in a Friday note. But she expects core services inflation to “remain sticky, supported by the tightness in housing and labor markets.”

The 0.3% monthly rise in the core consumer price index, if sustained, would add up to a 3.6% annual core inflation rate. That compares to Federal Reserve projections of 4.3% core inflation in 2022. If inflation stays on pace to undershoot projected Fed levels, policymakers may have to tighten less than expected.

Keep in mind that the CPI differs from the Fed’s preferred personal consumption expenditures price index. The latter includes government purchases on behalf of consumers such as by Medicare and Medicaid. It also factors in a substitution effect, when high prices lead consumers to adapt purchasing behavior. The CPI inflation rate typically exceeds the PCE inflation by roughly 0.3%.

Dow Jones, Treasury Yields Reaction To CPI Inflation Rate

Dow Jones futures rose 1.3% in early Wednesday stock market action. S&P 500 futures added 1.65% and Nasdaq 100 futures 2.3%.

The Dow Jones rally has lost some steam after Friday’s strong jobs report. Financial markets began pricing in one more quarter-point rate hike to a range of 3.5%-3.75% by early next year. However, rate hike odds tumbled in the wake of the CPI report. Markets now see 38.5% odds of a 75-basis-point hike in September.

As of Tuesday’s close, the Dow was down 10.9% from its all-time closing high on Jan. 4. The S&P 500 has fallen 14.1% from its peak close. The Nasdaq has tumbled 22.2%.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

The 10-year Treasury yield slid 6 basis points to 2.74%.

CPI Inflation Report Details

Prices for used cars and trucks fell 0.4% on the month, and rose 6.6% from a year ago. Used car inflation has come down sharply from a peak 35.3% annual gain in March.

Demand for used cars got a boost amid the global chip shortage that snagged production for new cars. Prices for new vehicles increased 0.6% on the month, while rising 10.4% from a year ago. April’s 13.2% annual rise was the biggest annual increase since 1949.

Energy prices fell 4.6% on the month and increased 32.9% from a year ago. The average national gasoline price has come down $1 per gallon, or 20%, since mid-June, according to AAA.

Prices for food away from home rose 0.7% in July vs. June, while rising 7.6% from a year ago. Prices for food consumed at home climbed 1.3% last month and 13.1% from a year ago.

Prices for medical services rose 0.4% on the month, bringing the year-over-year increase to 5.1%.

Meanwhile, shelter prices rose 0.5% in July, as owners’ equivalent rent rose 0.6%.

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