• February 8, 2023

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After months of worrying inflation data, today’s CPI report offered some good news. Inflation was flat for July, meaning prices did not move up compared to June. That’s in stark contrast to some months of 2022, when prices rose 1% or more compared to the prior month.

Of course, year-on-year inflation is still very high at over 8% because of the run-up in prices over the prior 11 months included in the headline inflation number, but will this be enough for the Fed to ease off on planned rate hikes?

The CPI Report

Though the report was good news, the reduction in inflation came primarily from falling energy prices, though other items such as clothing, some transportation costs and used cars did also fall in price. The reduction in energy prices is a clear a positive, but the Fed knows that energy prices are volatile and often strips them out to look at inflation without energy costs included.

Stripping Out Energy

On that basis without energy costs included, prices rose 0.4% for the month or a 4.9% annualized rate. That suggests the U.S. economy still has a problem with inflation. It’s well above where the Fed wants to see inflation trending, given their 2% target.


Also, food prices really matter to the economy. It makes up a large portion of the budget for those on lower incomes and it July’s 1.1% rise in food prices together with a 0.5% rise in the cost of shelter, may continue to concern the Fed. Inflation is continuing to squeeze the budgets of those least able to afford it on lower incomes.

The Fed Next’s Meeting – September 21

The Fed is scheduled to set interest rates again next month on September 21. Currently the markets still expect a large hike of 50-75bps, though a 50bps hike would be a slight softening compared to recent 75bps moves.

Today’s data may not be enough for the Fed to change course given its strong conviction on managing inflationary risks. July unemployment data was robust. That may give the Fed comfort that recessionary fears may be overstated as they try to tame inflation and keep the job market strong.

As a result the Fed may want to see more data that inflation is starting to come under control before softening its approach on rate hikes. Today’s inflation data was encouraging as energy prices are starting to ease.

It seems likely that have passed peak inflation in the U.S. at this point. However, price increases for many other areas of the economy still remain concerning for the Fed. Inflation is starting to fall, but still not by as much as the Fed would like and it may be some time before they can declare any sort of victory.


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