My Thoughts on the July CPI Report

The July CPI Report painted a familiar portrait for investors. Headline inflation remains steadily above the Fed’s 2% goal, pushed by tariffs, while core measurements indicate continued stickiness.

What You Missed

Headline inflation rose 0.2% month-over-month and 2.7% YOY, matching the pace from last month. Core inflation is up 0.3% and 3.1% for those metrics, respectively. This represents the fastest monthly pace in the previous 5 months. Energy and gas prices are down, while airfares have sharply risen.

The Market’s Reaction

The July CPI report triggered a broadly positive market response. Investors welcomed the data, sending the S&P 500 and Nasdaq indexes to record highs and boosting rate-cut expectations, with futures markets pricing in a more than 90% chance of a Fed cut in September. However, economists urged caution, noting the rise in inflation in core services like shelter, transportation, and medical care.

My Thoughts

A few key things to note here are that this report will not reflect the new tariffs for individual nations on August 7th. Additionally, in anticipation of the President’s tariffs, many companies stockpiled goods that were likely to be affected early on. As a result, companies could try to absorb costs and avoid driving customers away. Still, the uptick in month-over-month inflation suggests they can’t hold off anymore.

I mention this because we are in a deteriorating situation where inflation could increase. Yet, there are already calls for a rate cut of between 25 and 150 basis points. To be honest, I’m a bit confused. We are far off from the Fed’s inflation target of 2%, and just had an uptick in core inflation, so how come there have been bets in favor of a rate cut? Especially considering how a rate cut theoretically stimulates the economy, which could cause more inflation, I don’t think the latest CPI Report justifies one. The only arguments I see are that the report was moderate compared to expectations, with the expectation of overall inflation being 2.8% instead of 2.7%, which we ended up with. Also, one could argue that economic stimulus is required due to the poor job reports. But with core inflation over 3%, I don’t think those arguments are good enough.

Additionally, I’m not the only one concerned. Several economists, as well as Scotiabank, have expressed concerns about inflation and the reliability of the data due to budget cuts in the BLS.

So overall, my opinion is that a rate cut would be the wrong move at this time. We need to be careful about how we progress, especially with how tariffs are affecting our economy.

Disclaimer:

This blog post is for educational and informational purposes only. It is not financial advice. I am not a licensed financial advisor, and nothing in this post should be interpreted as a recommendation to buy or sell any securities. Trading involves risk, and results are not guaranteed. Past performance is not indicative of future results. Always do your own research and consult with a licensed financial professional before making any investment decisions.