Moderating inflation data lowers odds for September rate hike. The consumer price index increased 0.1% during July on a seasonally adjusted basis. Core CPI, which excludes the more volatile food and energy components, rose 0.2%. Annually, this translates to 3.4% and 2.5% respectively, both down 0.1% from June. Energy prices fell another 1.5% in July after a 5.7% June decline, but it is still up 14.7% year over year. Core goods rose 0.2% vs -.1% in June pointing to moderation in this sector. Within the core, services did about the same coming in at 0.2% vs 0.0% in June. Consensus forecast, along with PPR’s forecast, was right in line with the July data reading across both core and non-core CPI.
Two consecutive months of relatively softer inflation data have changed the picture for the Federal Reserve. The probability of a rate hike has dropped from 48% yesterday, down to 38% as of this latest data release according to CME Group’s FedWatch, which uses Federal Funds futures contract prices to calculate the market implied effective rate. Weak Retail Sales data released last Friday shifted the odds further, down to just 34% for an increase. We will get one more CPI print just a few days prior to the FOMC decision on Wednesday September 16th, but currently the Fed is most likely to hold rates steady at the next meeting.
