“Economic Shift: US Core CPI Records Smallest Consecutive Increases in 24 Months”

In July, the Consumer Price Index (CPI) experienced a modest increase, as reported by the Labor Department.

CPI
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The annual inflation rate for CPI rose slightly less than anticipated. The S&P 500 initially rose significantly at the market’s opening but has since reduced its gains since mid-morning.

The inflation data supports the existing expectations that the Federal Reserve’s policy will remain unchanged.

Here is a breakdown of the CPI inflation report for July:

  • Consumer prices in July increased by 0.2% compared to the previous month.
  • Core CPI, which excludes food and energy prices, also increased by 0.2% from June. These figures matched the predictions made by Wall Street experts.

The overall annual inflation rate for CPI rose to 3.2% compared to the previous month’s 3%. This increase in year-over-year inflation was influenced by unchanged prices in July 2022 compared to June 2022.

Core CPI inflation stood at 4.7%, slightly lower than the predicted 4.8% by Wall Street.

Specifically, core goods prices dropped by 0.3% during the month, with a 12-month change of just 0.8%. On the other hand, core services prices increased by 0.4% from May, leading to a 12-month increase of 6.1%.

While the average hourly wage rose by a substantial 4.4% in June compared to the previous year, a mere 16% of adults, according to the IBD/TIPP Poll, felt that their wages had kept up with inflation.

This is the lowest percentage since at least February 2022. In contrast, 58% stated that their wages had not kept pace. These figures indicate a decline from the 20%-55% range reported in July.

This perception of falling behind in wages might be influenced by the rebounding gasoline prices.

Although gasoline prices were still lower compared to a year ago, they had risen significantly in recent weeks. Gasoline prices increased by 0.2% compared to June, but they had fallen by 19.9% compared to the previous year.

In terms of jobless claims, initial claims for jobless benefits increased by 19,000 to reach 248,000. Although this figure remains historically low, it exceeded expectations, which were for around 229,000.

The impact of these inflation figures on Federal Reserve policy is expected to be minimal.

The increase in July’s CPI inflation rate was largely attributed to challenging year-over-year comparisons rather than a broad reacceleration of price pressures.

The three-month annualized change in consumer prices slowed to 2.3% in July compared to 2.7% in June, indicating a moderation in inflationary pressures.

Federal Reserve officials have indicated that they are approaching the end of rate hikes and adopting a wait-and-see stance.

After a rate hike in July, Fed Chief Jerome Powell noted that the late September meeting could involve another rate hike but hinted at the likelihood of no action due to balanced inflation-growth risks.

Investor sentiment appears to have soured, as reflected in the Economic Optimism Index hitting a one-year low.

Despite the initial strong reaction of the S&P 500 to the CPI report, it later tapered to a 0.7% gain. The S&P 500 had rallied 16.4% year-to-date through Wednesday, despite recent market pullbacks.

The 10-year Treasury yield increased by two basis points to 4.03%, having initially traded around 3.98.

This rise in the benchmark yield is attributed to increased Treasury issuance and stronger economic growth.

Short-term Treasury yields, which are more closely linked to Federal Reserve policy, have remained steady or decreased in recent weeks.

Looking forward, the Labor Department is set to release the July producer price index (PPI) on Friday. Economists predict that both the PPI and core PPI will show a 0.2% monthly increase.

The PPI inflation rate is expected to rise to 0.7% from 0.1%, while the core PPI inflation rate is projected to decrease to 2.3% from 2.4%.

FAQ’s

What is the difference between CPI and PPI?

The CPI includes within its scope goods and services purchased by domestic consumers and therefore includes imports. The PPI, in contrast, does not include imports, because imports are by definition not produced by domestic firms.

Is a high PPI good?

The Producer Price Index measures the cost of goods from the producers’ perspective. Higher PPI numbers signify higher inflation, which could lead to interest rate hikes. The stock market usually reacts negatively to high PPI reports, but this can change based on all other current economic data.

What happens when PPI increases?

An increase in the PPI usually means that inflation is on the way. Producers eventually will try to pass their cost increases on to consumers. A change in the PPI can signal a change in the Consumer Price Index.

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