Today, we got the July Consumer Price Index (CPI) report which showed an overall increase of 2.9% for the last year and 0.2% for the month. That’s below last month’s 3.0% and expectations of 3.0%. The 0.2% monthly increase was in line with the 0.2% expected, and a bigger increase vs last month’s -0.1%. The Core CPI which excludes food and energy was up 3.2% vs last year and up 0.2% from last month. Both of those were consistent with expectations. The annual number is still well above the Fed’s 2.0% target although there is a clear trend in recent months toward disinflation. (Disinflation is a reduction in the rate of inflation.) Let’s go through the details:

The CPI just cracked 3% and the sticky Core is declining.

Now above 2%. Still not “restrictive”, but tighter than before.

Food:

Food inflation came in at 2.2%, up 0.2% from last month. Food at home was up 1.1% which was the same as last month. I write this every month, but I continue to insist that anyone who believes that grocery prices are up only 2% hasn’t been inside a supermarket in years. Food away from home is now up 4.1% roughly the same as last couple of months. Anyone who’s seen the recent posts about bills of more than $20 for a burger, fries, and soft drink at fast food places won’t believe this number either. I write this every month, but I continue to be skeptical of this part of the CPI, and have been for the past two years. It seems understated to me.

Some people who I respect are saying that food prices really are up a small amount from last year and that consumers are still experiencing sticker shock based on the huge price increases we saw in 2022 and 2023. I acknowledge that may be a possible explanation, but either way, the official numbers show increases of 20% - 30% over just a few years, and many people I talk to are seeing multi-year price increases substantially higher than that. Whether the big move came in 2022, 2023, or is continuing now, both the rate of increase and price levels for food purchases are creating stress in many homes.

The reason I keep reprinting the same language about understated food inflation is because the BLS keeps printing the same nonsense.

Energy:

Energy has been an overall tailwind for the CPI following the huge increases in 2022. The July CPI shows energy prices up 1.1% vs last year, a strangely quiet number for a typically-volatile category. Gasoline was down 2.2% vs last year and fuel oil was down 0.3%.

Vehicles:

A couple of years ago, the massive increase in car pricing (especially used cars) was responsible for almost half the increase in the CPI. Now, more than half of those price increases have reversed. This isn’t disinflation; but rather the price of cars actually declining. 

In previous versions of this report, we’ve noted the prevalence of $1,000/month auto payments and increasing metrics for credit delinquencies. Overall, Americans look like they’re starting to struggle with increasing amounts of debt. Should that trend continue, it would be negative for car prices and make it easier for the Fed to cut rates.

Still expensive but with meaningful and continued improvement. Prices heading towards “normal” despite the little blip up at the end.

Services:

Worth noting that yesterday’s PPI report showed declining services prices. The breakout of those figures indicated higher transportation costs and lower wage costs. While both of those contribute to the services inflation calculation, lower wages would make it easier for the Fed to cut rates.

Housing prices remain at all-time highs even with mortgage rates up from three years ago. The recent decline in mortgage rates hasn’t helped.

Analysis:

In last week’s 5 Things, we noted a recent tick-up in the Manheim Used Car Index where prices rose from the prior month. I don’t think one month is a trend, but we also just saw an increase in goods inflation in yesterday’s PPI report. The Fed has struggled to get services prices down. If goods prices start to increase, they have a huge problem.

Washington DC has tried to get people focused on disinflation (a reduction in the rate of inflation). This chart shows why most Americans are experiencing more financial distress.

Conclusion:

The market had set expectations for a September rate cut at 100% and many are expecting a 50bp cut next month. Based on recent data, DKI has shifted its position from “higher for longer” to rate cuts “sooner rather than later”. I don’t think we’ll see a 50bp cut next month, but with today’s CPI below 3% and yesterday’s PPI below expectations, I think current market consensus is correct and that we’ll see a 25bp cut in September.

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