Inflation Held Steady at 2.7% in July Prices excluding food and energy categories rose 3.1% over the past 12 months, above forecasts
(…) For the Fed, the lack of a more alarming acceleration in price pressures likely removes an obstacle to lowering rates in response to growing worries about a slowing labor market. (…)
Prices either fell or stabilized in the categories that consumers tend to pay the most attention to: shelter, energy and groceries. That helped keep overall inflation in check.
Energy prices declined, grocery prices were roughly flat, and rent growth was modest in July. (…)
But muted inflation for energy and housing was offset by higher costs elsewhere, including some categories such as furniture, tires and pet products, that saw larger increases last month.
“That’s definitely a sign of tariffs passing through,” said Alan Detmeister, economist at UBS investment bank. (…)
In an interview on Fox Business Network Tuesday afternoon, Treasury Secretary Scott Bessent encouraged the central bank to consider a larger half-percentage-point rate cut at its September meeting. Bessent, who earlier this year warned the economy might face a “detox period” as it cut government spending, said the Fed could have been lowering rates at its last two meetings given payroll gains that were revised lower.
A largely benign US inflation report is bolstering the case for traders betting that the Federal Reserve will soon cut interest rates, with some seeing an increased possibility of an outsized reduction.
For weeks, investors have piled into swaps, options and outright Treasury longs to wager that subdued inflation will allow the Fed to lower borrowing costs in coming months. There’s some vindication for that view, with shorter-term Treasury yields dropping for a second day on Wednesday, while swaps traders lifted the odds of a September rate cut to more than 90%.
Bets that the Fed will reduce rates by more than 25 basis points in September also gained traction, with traders adding some $2 million in premium on Tuesday to a position in the Secured Overnight Financing Rate (SOFR) that would benefit from such a move.
The inflation report “was a bit stronger than we have seen over the prior few months, but lower than many have feared,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, in a note. “As a result, we expect the Fed to begin cutting rates in September, and it could be justified cutting the Funds rate by 50 basis points.”
Tuesday’s report was far from an all-clear for the Fed. Though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures, underlying US inflation accelerated in July by the most since the start of the year. (…)
Wells Fargo’s account:
July CPI: Broad Heat in the Core
Excluding food and energy, the core CPI was hotter, rising 0.32% over the month and pushing the year-over-year rate up to 3.1%—its highest year-ago reading since February.
The details show tariff-related price increases continuing to seep into the economy, with core goods prices rising 0.2% in July amid additional increases for heavily imported items, such as household furnishings and recreational goods.
Core services inflation picked up a stronger-than-expected 0.4% as a rebound in airfares and a strengthening in medical care services prices overtook the gradual moderation in primary shelter cost growth. Yet, with medical care and airfares not serving as source data for the PCE deflator, we currently estimate the core PCE index rose a softer 0.22% in July.
Today’s CPI report illustrates the challenges the Fed faces in its efforts to balance its price stability and maximum employment dual mandate. The labor market is showing signs of lost momentum, but inflation is 1) still above the 2% target and 2) drifting in the wrong direction.
We are skeptical of rate cuts much deeper than our current forecast of 25 bps cuts at the FOMC’s next three meetings given the prospects for above target inflation over the next year. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view. (…)
For all the consternation over the impact of tariffs on goods prices, it was mostly service-related categories that accounted for the firmer core reading in July. Medical care services (+0.8%) and airfares (+4.0%) posted monthly readings that were stronger than we were expecting and above their recent trends. (…) Primary shelter inflation continues to moderate on trend and is starting to approach its pre-pandemic pace.
Core goods inflation was 0.2%, below the 0.3% we were expecting but above the 0.05% that this category averaged in the 12 months ending in June. Tariff-related price increases continued to seep slowly into the data, with prices for household furnishings, apparel and recreational goods once again climbing higher. Prices for used autos rose 0.5% in the month, while new vehicle prices were roughly flat in July.
With medical care and airfares not serving as source data for the PCE deflator, the Fed’s preferred measure of inflation looks likely to be somewhat softer in July. We currently estimate the core PCE index rose 0.22% last month. We will update our estimate following Thursday’s PPI report. (…)
Meantime, energy prices slid 1.1% in July with broad-based declines in gasoline (-2.2%) and energy services (-0.3%). Over the past year, energy prices are down 1.6% and have served as a source of deflationary pressure on overall consumer prices. Yet the downdraft has been due largely to lower oil prices.
Energy services, while dipping in July, are up more than 7% over the past year. Further strength is likely in store, specifically for electricity prices, as utilities contend with higher upkeep costs and growing demand for nonresidential uses. (…)
The pass-through to prices from higher tariffs is not a one-month event. Stockpiling and reluctance to immediately raise prices has helped mitigate the impact to consumers thus far. However, with tariff rates settling higher and no reason to think they will come down for the foreseeable future, we expect the added costs will continue to seep through to selling prices in the months ahead, leading to further strength in goods prices.
Core services inflation is likely to slow only somewhat further in the near term, with primary rents, airfares, motor vehicle insurance and medical care services all at or near their disinflation nadir.
(…) we are skeptical of rate cuts much deeper than this given the prospects for above target inflation over the next year due to higher tariffs and fiscal stimulus that will start to hit the economy sometime in H1-2026. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view.
My observations:
- Goods deflation seems over. Prices are not exploding but goods are no longer contributing to slowflation:
- Services inflation has seriously accelerated since its March low, in spite of slowing wages and low oil prices. Many surveys mentioned tariffs as a source of services inflation. Maybe service providers are more easily passing through their tariff-related cost increases.
- The correlation between services and headline cpi inflation is 88.2% since 1969:
John Authers:
Tariff Derangement Syndrome Is Meeting Reality The links between inflation, a rate cut, and a record for stocks aren’t what they seem.
Outside food and energy, US prices are picking up again. Disinflation after the epic post-pandemic price shock is over. In other news, the latest nominee for the Federal Reserve’s board of governors is chiding his new colleagues for “tariff derangement syndrome” and the US Treasury secretary says that a jumbo cut of 50 basis points would be in order next month. And the US stock market has surged to an emphatic new record. (…)
The inflation numbers don’t strengthen the case for a rate cut. All else equal, they should be bad for stocks. But the intense political pressure for a rate cut has little to do with the data.
That pressure has moved the dial toward easy money. Rate cuts don’t generally happen when inflation is above target and no recession appears imminent. When they do, the stock market might well melt up. Hence Tuesday’s buying.
Last week, the nominee Fed governor, Steven Miran, told Bloomberg there was “zero macroeconomically significant evidence of price pressures from tariffs.” If there were any effect, he said, it would be a “one-time price shift,” as happens when governments raise sales taxes, and not an enduring regime change. If the administration’s message wasn’t clear enough, Treasury’s Scott Bessent piled on to say that the Fed should consider cutting by 50 basis points next month.
It’s hard to reconcile such rhetoric with the actual numbers. This is our standard beautiful chart, dividing inflation into its four core elements:
Tariffs have their most evident effect on core goods, which are scarcely visible in the big chart. Here is the sector’s contribution to CPI in isolation:
Two points are clear. First, core goods aren’t contributing much to the overall price burden. Second, their prices usually have a tendency to go down, so even if they add only two-tenths of a percentage point to bring core CPI to 3.1%, a trend has turned. It’s not terrifying, but is concerning. Some tariffed products (like home furnishings) are already showing signs that the levies are being passed through, and others (notably new cars) aren’t (…).
Omair Sharif of Inflation Insights LLC warns that of 75 items within core goods, 65.3% rose in July, up from 57.3% in June and the highest in 30 months. He suggests that a wider swathe of core goods is steadily being impacted by higher tariffs.
Services, not goods, have been leading inflation and continue to do so. Chair Jerome Powell started to look at “supercore” (core services minus shelter) as a priority, which is unfortunate as it has unambiguously turned upward, rising to 3.2% from 2.7% in April.
(…) the key is that the trend is no longer in the right direction. The same is true if we look at inflation of sticky prices, for products whose prices take a while to change and are very difficult to cut. Again, this inflation is rising again, and it never got down to the Fed’s upper bound of 3%:
The Cleveland Fed produces a median CPI, and also a trimmed mean, which excludes outliers. Both these purists’ measures of core inflation have stopped falling and started to rise, without ever getting within target range. Outside the post-pandemic spike, the median hasn’t been this high in more than three decades:
The overall numbers look good because one of the Trump 2.0 priorities, a lower oil price, is coming through in spades. Cheaper gasoline will make people much happier and brings the headline rate down to 2.7%. Exclude energy, and everything else is at 3%. It’s not at a level that would normally encourage central bankers, who generally ignore oil prices as they have no control over them, to ease rates:
(…) Wage inflation is falling, but not as fast as the Fed would like. These are the wage-tracker numbers produced by the Atlanta Fed from census data. Wages are rising, for both full- and part-time employees, faster than at any time in the 20 years before Covid:
Jim Bianco of Bianco Research makes the devastating point that in the last 40 years, the Fed has only once cut rates when the core was above 3% and the three-month change was greater than 0.3%. That was between October 1990 and March 1991 when there was war in the Persian Gulf and the economy slid into recession.
The Fed might now give up on its 2% target. There’s an argument for that, but the electorate seemed to feel differently last November, after the battering from inflation during Joe Biden’s presidency. As for stocks, everyone understands the potential of artificial intelligence. But the S&P 500 is trading at a record multiple of sales, so a lot is riding on keeping margins high:
Share prices shouldn’t be viewed in isolation. Lower interest rates justify higher valuations. But if we compare the S&P’s earnings yield (the inverse of the price/earnings ratio) with the 10-year Treasury yield, or its dividend yield with the three-month Treasury bill, stocks look terrible value. Those rate cuts really need to happen:
Tariffs’ pass-through to prices to date has been weaker than many had feared. But it’s not deranged to monitor the risks, which are clear and obvious. Whether it’s deranged to pile into stocks is another matter. With a dovish error apparently in the pipeline, maybe it makes sense.
Allow me two last charts to add to Authers’ referring to Jerome Powell’s supercore CPI.
Monthly supercore inflation has been above 3.0% annualized in 10 of the last 11 months. It averaged 3.8% in the last 6 and 3 months and 4.2% in the last 2 months. No longer in the 5%+ range of 2023 but uncomfortably high for what Powell sees as a fundamental underlying inflation indicator.
FYI, supercore inflation averaged 2.1% between 2010 and 2019:
The Partisan Economist Trump Wants to Oversee the Nation’s Data E.J. Antoni lacks the research record of previous commissioners of the Bureau of Labor Statistics, but has a solid record of backing Trump’s narrative of the economy
President Trump this week tapped Antoni to run the agency whose data and methodologies he has long criticized, especially when it produces numbers that Trump doesn’t like. He recently proposed suspending the monthly jobs report, one of the most important data releases for the economy and markets. On Tuesday a White House official noted that Antoni made the comment before he knew he was going to be chosen, and that his comments don’t reflect official BLS policy.
If confirmed by the Senate, Antoni would run a 141-year-old agency staffed by around 2,000 economists, statisticians and other officials. The BLS has a long track record of independence and nonpartisanship that economists and investors say is critical to the credibility of U.S. economic data. (…)
Past BLS commissioners have had extensive research experience, and many have climbed the ranks of the agency itself. Antoni doesn’t fit that profile. He doesn’t appear to have published any formal academic research since his dissertation, according to queries of National Bureau of Economic Research working papers and Google Scholar. Much of his commentary on the Heritage website praises Trump’s policies and economic record. He frequently posts on X and appears on conservative podcasts such as former Trump adviser Steve Bannon’s “War Room,” where he criticized the economy under President Joe Biden and lauds Trump’s economy. (…)
“It’s not a matter of making the numbers look good, it’s a matter of them being accurate,” Antoni said on Bannon’s Aug. 1 show after McEntarfer’s dismissal. “The models and the methodologies need to be revised.”
Antoni told Fox News Digital in an interview on Aug. 4 that “BLS should suspend issuing the monthly job reports” until its methodologies are corrected. Such a move would be unprecedented, leaving the public and markets without a vital source of information on the economy’s health.
His commentary on the data has been partisan. During Biden’s final year in office, Antoni argued the consumer-price index was understating inflation. In July 2024, he said its monthly rent data was “stale” and the real costs wouldn’t show up until after the election. In fact, while BLS data showed rents rising more slowly than private data in 2021-22, by 2024 the reverse was true: it showed rents up 5.2% that June from a year earlier, compared with 3.2% for Zillow.
On Bannon’s Aug. 1 show, he wrongly said that Biden had removed McEntarfer’s predecessor, Bill Beach, whom Trump appointed in 2019. In fact, Beach remained in the job until his four-year term expired in 2023, something Beach has said he was “very grateful” for.
Conservatives praised Trump’s choice. “EJ Antoni is one of the sharpest economic minds in the nation—a fearless truth-teller who grasps that sound economics must serve the interests of American families, not globalist elites,” Heritage Foundation President Kevin Roberts said in a statement.
But several independent economists said he is unqualified. “There are a lot of competent conservative economists that could do this job,” said Kyle Pomerleau, a senior fellow at the right-of-center American Enterprise Institute, in a social-media post. “E.J. is not one of them.”
Harvard University economist Jason Furman, who was chair of the Council of Economic Advisers under President Barack Obama, said on X, “E.J. Antoni is completely unqualified to be BLS Commissioner. He is an extreme partisan and does not have any relevant experience. He would be a break from decades of nonpartisan technocrats.” (…)
Also in the WSJ:
The truth is that the recent sharp downward revisions are a result of declining business survey response rates that require agency statisticians to rely more on models and guesswork. Numbers are later revised when more data is collected. Declining survey response rates are a real problem for the BLS and other federal statistical agencies.
The response rate for the BLS establishment survey, which is used for the monthly jobs report, has fallen to 43% from 61% over the last decade. Response rates for the household survey that feeds into the unemployment and labor force participation rates have declined to 68% from 88%. Inflation reports may also be affected by falling response rates in calculating shelter prices (14 percentage-point decline over a decade) and weights for items in the consumer price index (28 point decline). (…)
Another problem: A funding shortage has caused BLS to stop collecting some granular data that can illuminate economic changes. The BLS this month will stop calculating some 350 individual producer price indices showing which industries pay for goods and services. (…)
Trump Calls on Goldman to Replace Economist Over Tariff Stance Bank’s economists had predicted tariffs could cause inflation and slow economic growth
Trump said on his Truth Social social-media platform that Solomon should “go out and get himself a new Economist” because the bank made a “bad prediction a long time ago” on the market and tariffs. The president asserted that tariffs haven’t caused inflation or other issues for the U.S. economy.
He also questioned whether Solomon himself should focus on just being a DJ, a reference to the bank chief’s former side gig.
Trump appears to be referring to Jan Hatzius, the bank’s longtime chief economist, though he didn’t call him out by name or title. Hatzius is well-known on Wall Street for forecasting in 2008 that mortgage defaults could lead to a severe recession.
Hatzius and his team have been among the many economists who have predicted tariff policies would dent labor markets, cause higher inflation and slow U.S. economic growth.
A report by Hatzius and his team Sunday included an analysis that found U.S. consumers had absorbed 22% of tariff costs through June, but will eventually absorb 67% if recent tariffs follow the same pattern as earlier tariffs. This assessment is similar to those of other economists. (…)
Trump said in his post that consumers, for the most part, aren’t paying the tariffs but rather it is “mostly Companies and Governments, many of them Foreign, picking up the tabs.”
Inflation data released Tuesday showed steady increases in consumer prices, but a higher-than-expected uptick in a key measure of underlying price growth. (…)
Complicating the issue for six of the biggest banks is the fact that they are in the running to work on the Trump administration’s potential initial public offering of mortgage giants Fannie Mae and Freddie Mac. If it happens at the valuations being discussed, the offering could be among the largest of all time, which means missing out could lead to many millions in lost fees. (…)
White House to Vet Smithsonian Museums to Fit Trump’s Historical Vision
The White House plans to conduct a far-reaching review of Smithsonian museum exhibitions, materials and operations ahead of America’s 250th anniversary to ensure the museums align with President Trump’s interpretation of American history.
In a letter sent to Lonnie Bunch, the secretary of the Smithsonian Institution, three top White House officials said they want to ensure the museums present the “unity, progress, and enduring values that define the American story” and reflect the president’s executive order calling for “Restoring Truth and Sanity to American History.” (…)
Tiya Miles, a professor of history at Harvard University, said she was concerned that the Smithsonian would be asked to interpret history based on “one man’s view” as opposed to scholarship and research.
“The Smithsonian museums have never reflected one person’s view, or even one administration’s view,” Miles said. “They have reflected the composite research, analysis, discussion, findings of many different people, scholars and researchers.” (…)