The consumer price index (CPI) ticked upward slightly in the most recent report from the Bureau of Labor Statistics (BLS). While inflation rose at a slower rate than expected, the latest events surrounding President Donald Trump's dismissal of commissioner Erika McEntarfer and his accusations of the data being rigged have led to questions about how to interpret a report that, in past years, would not have created such a volume of reaction.
Here are a few reactions shared with InvestmentNews surrounding the latest report.
CPI data that was in-line with expectations will not change the outlook for a September rate cut which was already largely priced into markets, but should provide a boost to risk assets with equities higher and interest rates lower as traders unwind hedges they had put in place to protect against the risk of an upside surprise in the data, which failed to materialize.
Today’s release showed less of a pickup in goods prices than some were expecting as the tariff pass-through is present but to a lesser degree than was seen in June. Given the uncertain and shifting tariff landscape that existed through the month of July and into August, we would be hesitant to read too closely into today’s release.
Today’s CPI report, in line with forecasts, but above the June 12-month data, puts the Fed is a predicament of trying to balance a possibly weakening labor market vs two months in a row of rising inflation and above average CPI.
The July payrolls report missed forecasts and the unemployment rate ticked higher – signs of a potentially weakening labor market. Meanwhile, 12-month CPI came in above the prior month for June and now for July.
While one data point does not make a trend, two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting.
We remain bullish on the S&P 500 index into year end, but we do not expect a September rate cut unless the jobs market drops off drastically over the next 45 days.
If the Fed has to choose between shoring up the labor market or fighting inflation, we believe they will opt to backdrop the labor market.
July CPI at 2.7% delivered a mild relief rally — softer than expected and friendly for the Fed’s easing outlook. But with tariffs in play, investors should enjoy the calm while keeping an eye on the horizon.
The July CPI report came in broadly in line with expectations, reinforcing the view that inflation is under control, even if not quite at target. The headline print was contained by falling energy and gasoline prices, while services remained the primary driver of the overall increase.
... In our view, the Fed will look through the noise in goods inflation and focus on the broader macro signals; labor market softness, consumer fatigue, and the risk that slowing growth could become deflationary over the medium term. This CPI print does not derail the case for a September cut, if anything, it supports it.
As the battle continues over whether or not tariffs will lead to persistent inflation, this month’s report did nothing to convince anyone.
The headline YoY number held steady at 2.7%, but the core number rose slightly to 3.1%. Although the Fed supposedly focuses more on the core number than on the headline number (in order to strip out the noisier components of inflation), we don’t believe that this report will deter the Fed from cutting rates next month.
More importantly, there is one more jobs report (on 9/5) and one more CPI report (on 9/11) before the Fed meets again and those reports will take on even more importance as the Fed decides whether to cut rates to preemptively support the labor market or whether the inflation reports are concerning enough that they feel like they need to sit on their hands and wait.
In this environment stocks can continue to move higher and it is going to take a much larger inflation number – or other shock to the market – for a correction to commence. With many strategists expecting volatility in the months ahead, yet recommending that dips should be bought, it’s hard to envision a very large pullback absent an actual recession.
More signs of a bull steepening yield curve, suggesting that for the economy to avoid stall speed, rate cuts are more likely as inflation appears temporarily contained. Historically, bull steeping cycles have been bearish for stocks, but many traditional value sectors like financials will benefit from a steeper yield curve if the economy is able to dodge a material slowdown.
Hotter inflation amid a backdrop of slower growth could signal a stagflation-lite period.
Bottom Line: Investors must come to grips with inflation above the Fed’s target amid a backdrop of slower growth, setting things up for stagflation-lite. Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market.
After a disappointing July jobs report and a dismal revision to the prior two months, investors are currently pricing in a rate cut for the Fed’s next meeting in September. The only thing that could change that is a spike in inflation, and while today’s print isn’t necessarily rosy, it’s unlikely to change those rate-cut expectations.
The Fed’s monetary policy is tied between two main metrics: Employment and inflation. If both are moving in the wrong direction — like they are now — the Fed will be forced to address the bigger risk. With inflation on the rise, the committee is being put in a tough spot, but when push comes to shove, they will likely do what’s necessary to save the jobs market given how vital it is to the economy.
For Investors: After the Nasdaq 100 initially hit record highs on Monday, we saw a bit of “risk-off” action ahead of today’s print as US stocks closed lower. This morning’s CPI reaction is one of relief, as we’re now seeing a move back to “risk-on” assets like stocks and crypto. With CPI out of the way, the focus will shift to Friday’s retail sales figure, where we’ll see if consumers appear as upbeat as corporate earnings commentary has made them seem and amid worries about the labor market.
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