June inflation reports gave Wall Street something it hadn’t seen in a while: negative month-over-month readings. These came as energy prices slumped on a ceasefire between the U.S. and Iran.
It’s unlikely that we’ll see similar readings when the July Consumer Price Index (CPI) is released Wednesday morning, considering oil prices surged more than 20% last month as peace talks between Washington and Tehran fell apart.
Unless a new ceasefire can be agreed upon, expect inflation to rise again, writes David Payne, staff economist and reporter for The Kiplinger Letter, in the Kiplinger inflation outlook. He anticipates the 12-month inflation rate will be back near 4% by year-end if a standing resolution is not reached.
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Higher inflation is unlikely to encourage the Fed to lower interest rates — and before last Friday’s release of a shockingly weak July jobs report, futures traders were pricing in a quarter-percentage-point rate hike at the September FOMC meeting.
At last check, CME Group FedWatch showed 50-50 odds the Fed raises rates or keeps them unchanged next month. The July CPI data could shift that needle.
What is the CPI?
“CPI is a measure of the average price of that basket of goods and services over time,” writes Kiplinger contributor Coryanne Hicks. “The specific goods and services within the CPI basket are based on information that around 24,000 families and individuals give the U.S. Bureau of Labor Statistics on what they buy.”
The two primary measures of CPI are headline, which is the total inflation rate experienced by households, and core CPI, which excludes volatile food and energy prices.
Core CPI came in better than expected in June, unchanged on a monthly basis and up 2.6% year over year. But “the good news on core inflation may not last,” says Payne. “Services prices typically rise at a moderate pace, so the lack of an increase in June may not be repeated.”
And higher gas prices may cause businesses in general to “raise prices just to cover their costs, creating another upward push to core prices,” he adds. “Food prices may come under new pressure by the end of the year, as one-third of the world’s fertilizer supply is produced in the Persian Gulf region.”
When does the July CPI report come out?
The Bureau of Labor Statistics will release the July CPI report at 8:30 am Eastern Standard Time on Wednesday, August 12.
Headline CPI is expected to be up 0.1% from June to July and 3.4% from the year prior. Core CPI is forecast to rise 0.32% month over month and 2.5% year over year.
Ahead of the July CPI report, we looked at what economists, strategists and other experts on Wall Street expect the data to show. You’ll find these outlooks, edited at times for brevity, below.
What Wall Street expects from the July CPI report
(Image credit: Getty Images)
“The S&P 500’s breakout from a nearly two-month trading range could get a test this week from inflation and geopolitics. The jobs report may have eased some anxieties about a Fed rate hike next month, but those concerns could hit new highs without cooler-than-expected inflation numbers this week.” – Chris Larkin, Managing Director, Trading and Investing at E*TRADE from Morgan Stanley
“Our expectations are for a roughly 2% decline in gas prices to weigh on July’s headline CPI relative to core. Should our forecasts hit the mark, the year-over-year rate for both would tick down a tenth, the former from 3.53% to 3.45% and the latter from 2.59% to 2.51%.” – Deutsche Bank economists
“The report should reinforce the view that the worst of the inflationary effects from a higher-tariff regime and the conflict in the Middle East are behind us. Increases appear driven by a narrow set of categories rather than a broadening in underlying price pressures. Yet, while inflation pressures are becoming less widespread, continued strength in a handful of sectors suggests progress toward 2% is likely to remain gradual.” – Wells Fargo economists
“Investors are looking for another relatively benign inflation report, with headline CPI expected at 3.4% year-over-year and underlying price pressure remaining contained. Energy could add renewed pressure after a softer reading last month, as escalating U.S.-Iran tensions pushed oil prices higher in July. Still, markets reacted more calmly this time, as proactive workarounds and strategic reserve releases helped keep oil flowing. The Fed has the luxury of seeing two inflation reports before its next meeting, giving policymakers more time to assess whether energy pressure stays contained or starts broadening, a distinction likely to shape the future path of policy.” – Jason Pride, Chief of Investment Strategy & Research and Michael Reynolds, Vice President of Investment Strategy at Glenmede
“Although year-over-year inflation should have moved lower, the projected July pace remains noticeably above pre-Iran conflict levels and above a year ago, underscoring that headline inflation remains elevated despite recent moderation. We expect core inflation firmed after June’s unexpectedly weak reading, driven primarily by a rebound in core non-rent services, where transportation, medical, and communications services prices are expected to have returned to a more typical pace of increase.” – Jonathan Pingle, Economist at UBS Global Research
