CPI Data Close To Expected

Key inflation figures are in for July, with CPI rising 3.2% on 2022, and 0.2% month-on-month.

The market's consensus was for the CPI to have risen 0.2% in July, with the annual rate increasing to 3.3%, up from 3% in June (the lowest since March 2021). The increase to 3.2% is marginally below expectations, but still the first rise in the annual rate since June 2022, when it peaked at a 40-year high of 9.1%.

The closely-watched core inflation measure was 4.7%, vs 4.8% expected (0.2% month-on-month).

June's print had been cause for cautious optimism. Headline inflation came in at an annualized rate of 3%, with a monthly increase in the closely-watched core CPI of just 0.2%: The smallest monthly increase since August 2021. The figures suggest that the Fed may have achieved its aim of securing a "soft landing": Bringing inflation under control, without pushing the economy into recession.

While good progress has been made, today's print shows that the Fed has more work to do to hit its stated 2% inflation target—and the last 1.2% may not be easy.

Statistical Effects

Inflation is calculated from 12 months of historical data, updated on a rolling basis. This means that any large month-on-month increase remains in the figures for a whole year, but will then fall out of the data set, thereby causing inflation to drop. For example, the sharp increases in oil, gas, and food prices associated with the invasion of Ukraine have now left the CPI series, which has helped bring inflation down.  

However, these increases are now baked into prices, which remain high, even though inflation (the rate of increase in prices) is lower. Since this is a purely statistical effect, it happens regardless of any monetary policy or other action by the government to bring inflation down.

The remaining decrease to the target of 2% will be harder to address, and will rely on policymakers getting on top of persistent, entrenched inflationary effects. This is why the Fed is talking about holding rates high for an extended period, and even hinting at further hikes.

Inflation And The Markets

The CPI print is keenly watched by traders, since it informs changes to the Fed's base rate. When inflation is trending upwards, the Fed is more likely to raise interest rates to bring it back under control. A below-expected print makes further raises less likely.

Interest rates affect how expensive it is to borrow money, and how attractive assets like government bonds are. When traders can make a return on low-risk bonds, they are less likely to put money into riskier assets like stocks and crypto.

Bitcoin was trading around $29,500 before the data was released. Despite a slight bump in price, it did not display the signature volatility for which these events have become known.

Overall, the US has been successful in combating inflation. Other major economies have struggled. The UK, for example, has seen persistently high inflation, particularly core inflation. Meanwhile, yesterday China officially entered deflation.

The past decade of ultra-low interest rates and QE has been positive for risk assets, because they are the best way for investors to earn a return.

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