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Thoughts From Last Week
While inflation is expected to trend lower, it is unlikely to return to the Fed's target anytime soon. As such, a data-dependent Fed will likely continue to tighten policy into the end of 2022.
Following a relentless rise in inflation this year, markets have finally been able to breathe a sigh of relief as the July inflation figures were softer than expected. Headline CPI was unchanged month-over-month, whereas the year-over-year figure cooled to 8.5% from 9.1% in June. However, core CPI, which excludes food and energy, rose by 0.3% m/m and was unchanged on a year-over-year basis at 5.9%.
Turning to the details, the decline in energy prices was a key driver of this downward surprise, falling by 4.6% from a month prior. “Re-opening” demand seems to be cooling off too, with airfares and hotel prices easing by 7.8% and 3.2%, respectively, and used car prices also falling by 0.4%. On the other hand, food and shelter inflation remain persistent. Food prices increased by 1.1% m/m and owner’s equivalent rent increased by 0.6% m/m. These numbers will be important to watch going forward, as food and shelter account for nearly 45% of the consumer price index and have a significant impact on inflation expectations.
The Federal Reserve will take note of this decline, but at best it offsets the very hot July jobs report. Furthermore, while inflation is expected to trend lower, it is unlikely to return to the Fed’s target anytime soon. As such, a data-dependent Fed will likely continue to tighten policy into the end of 2022, and the market’s expectation for rate cuts next year seems a bit misplaced.
Source: BLS, FactSet, J.P. Morgan Asset Management.