Today’s Consumer Price Index will provide the first look of inflation data for July, with market participants eager to see if the number topped out last month. Economists expect the figure to rise 8.7% Y/Y, down from the 9.1% clocked in June. Core CPI — which strips out volatile components like food and energy — is still expected to increase 6.1% vs. 5.9%, and that number is set to highly impact whether the Federal Reserve raises rates by 50, 75 or even 100 basis points in September.
U.S. national average gas prices are finally close to falling under the $4.00 mark, as commodity costs come down aggressively, though housing and labor costs are still soaring against a contraction in economic output. “Services are going to be challenging… they’re stickier,” noted Jose Torres, senior economist at Interactive Brokers. He’s specifically looking at airfares and food away from home, as well as durable goods indexes and “how wage gains are being passed on to consumers.”
Not everyone is calling a peak in inflation. Dan Varroney, CEO of consulting firm Potomac Core, doesn’t “expect to see a significant reduction in the CPI,” mostly because the June Producer Price Index ran hot at 11.3%. “Input costs remain really high,” he told Seeking Alpha, and while gas prices have declined, “diesel costs haven’t shrunk appreciably.” M2 money supply also isn’t pointing to lower inflation as “the Senate just approved legislation that’s going to increase that amount of cash — and then the CHIPS Act — you’re probably talking in round numbers about another billion in cash.”
What does it mean for markets?
Stocks have generally rallied since gas prices peaked in mid-June, while medium- and long-term Treasury yields dropped from their peaks on broad-based expectations of easing inflation. If this morning’s CPI reading (scheduled for release at 8:30 a.m. ET) comes in stronger than expected, that could “shatter market sentiment, along with the strong jobs report on Friday,” according to Torres. The U.S. dollar will also remain sensitive to the data, with investors “deciding whether slowing headline is more important than sticky and strong core,” wrote strategists at TD Securities.