The latest inflation data from July painted a mixed picture, with consumer prices staying within expectations while producer prices surprised to the upside. Let’s break it down.
Consumer Price Index (CPI): Inflation on a Steady Path
- Monthly Change: +0.2% (in line with expectations)
- Year-over-Year: +2.7%
- Core CPI (ex. food & energy): +0.3% in July, +3.1% year-over-year
Key Details:
- Energy prices fell 1.1%
- Food prices were flat
- Real average hourly earnings rose 0.1% in July, up 1.2% over the past year
- Services led the gains—airline fares surged 4.0% (largest jump in over 3 years) and dental services rose 2.6% (largest monthly increase on record).
While core prices moved higher, the six-month inflation trend remains moderate—1.9% annualized for headline CPI and 2.4% for core CPI. The upward pressure came mainly from services rather than tariff-affected goods, reinforcing the idea that tariffs shift spending patterns but don’t necessarily push overall inflation higher.
Given slowing money supply growth (just over 1% since April 2022) and relatively high real rates, there’s room for modest Federal Reserve rate cuts—potentially as soon as the September meeting.
Producer Price Index (PPI): A Hotter Surprise
- Monthly Change: +0.9% (largest gain in over 3 years, far above the +0.2% consensus)
- Year-over-Year: +3.3%
- Core PPI (ex. food & energy): +0.9% in July, +3.7% year-over-year
Key Details:
- Energy prices +0.9%
- Food prices +1.4%
- Goods prices +0.7% in July, +1.9% year-over-year
- Services prices +1.1%, driven heavily by wholesale trade margins (+2.0%)
Despite July’s spike, the six-month goods price trend remains tame at +0.7% annualized. More than half of July’s goods increase was due to food and energy. Services inflation, not goods, was the main driver—suggesting the jump may be a one-off rather than a sustained surge.
Bottom Line
The July CPI report shows inflation is stable and trending moderately, while the PPI surge is likely more noise than signal. With monetary policy still tight, we believe the Federal Reserve has room to cut rates modestly in the months ahead—potentially beginning in September.