"Today’s Consumer Price Index (CPI) report for July continues the pattern of a somewhat gradual disinflationary progress, albeit to levels of inflation that are still too high based on the Federal Reserve’s stated mandate and consumer preferences. At an overall level, the report was moderately encouraging, with new cycle lows in year-over-year headline CPI of 2.9% and core CPI of 3.2%. Month-over-month unrounded headline and core CPI both came in closer to 0.15% than 0.2%, resulting in rounding making the report look slightly worse than it was. However, much of the disinflationary progress in core CPI was concentrated in the volatile used car category, which declined 2.3% month-over-month, and medical care services, which is less reflective of the balance of supply and demand in the economy than other categories given its highly regulated nature. Concerningly, shelter inflation, which accounted for the bulk of the increase in month-over-month inflation, reaccelerated after an encouraging slowdown in June. That said, combined with yesterday’s weaker than expected July Producer Price Index report, we should expect a Personal Consumption Expenditures (PCE) price index later this month that will reassure the Federal Reserve that inflation is moving in the right direction.
While recent progress on inflation in encouraging, in the broader context, underlying inflation in the economy is still running in the ~3% range, an uncomfortably high level. This will become increasingly clear in coming months, as year-over-year comparisons will pick up the extremely low inflation readings in the second half of 2023, which will likely cause advocates for rate cuts to focus on monthly and three month annualized figures rather than the full range of inflation readings that should inform policy. July’s CPI report will likely keep the Fed on track for a rate cut in September, but they should proceed carefully down the path of easing monetary policy lest they risk a reacceleration in inflation that Americans will not like.”
- Dan Katz, Manhattan Institute Adjunct Fellow.
Katz previously served as a senior advisor at the United States Department of the Treasury. He has published widely on economic policy, international affairs, and financial markets in City Journal, The Wall Street Journal, Bloomberg, the Financial Times, Barron’s, National Review, The Hill, and the Center for Strategic and International Studies. For a list of his previous writing at the Manhattan Institute, click here.
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