August 10, 2022 | 09:09
U.S. CPI: Pushback
American households are starting to rebel against rampant price increases, notably in the high-flying travel industry. The consumer price index was unchanged in July after spiking 1.3% the prior month, pulling the yearly rate down to 8.5% from a four-decade high of 9.1%. Gas prices plunged 7.7% (and further in August), though the recent slide in crop prices hasn't provided much relief at grocery stores, as overall food costs jumped 1.1% (lifting the yearly rate to 10.9%, the highest since 1979).
The real surprise was in a much smaller-than-expected rise in core prices, up just 0.31%, which is the least in 10 months (to the second decimal place). This followed a hefty 0.7% jump the prior month, and held the yearly rate at 5.9%. The year-ago comparables are equally challenging in the next two months, so we could still see a six handle again, even if we don't take out March's 41-year peak of 6.5%.
There was no single reason for the light core print, but three travel-related areas--airlines, hotels, and vehicle rental companies--all cut prices for a second straight month. With many travelers now exhausting earlier pent-up demand, fewer people are willing to face hassles at the airport or pay the well-above pre-pandemic cost of flying, rooming at a hotel, or renting a car. These three items lowered core prices by just over a tenth of a percentage point. Clothing prices also slipped in July, possibly due to retailers discounting surplus items. As well, used car prices backed off a bit after a renewed resurgence of late. However, new vehicle prices continued to motor higher and residential rents are rising briskly, albeit slightly less than in June.
Bottom Line: The July CPI report might be the first clear indication that consumers are pushing back against high inflation in response to tighter monetary policy. It's a sign that inflation is close to peaking, though the climb down the mountain will be slow due to rising wages and rents. The report will go some ways to offsetting the impact of the strong July jobs report in the Fed's eyes, though policymakers will need to see more convincing evidence that inflation is heading toward the 2% target. The Fed will see one more jobs report and another CPI release before the September 20-21 meeting. For now, we lean toward a 50-bp rate hike in the face of weaker economic data and some moderation in consumers' long-run inflation expectations.