What the latest CPI reading showed, how the markets reacted, and what we expect from the Fed…
WHAT THE CPI SHOWED
According to the data released, inflation in the U.S. came in at 2.7% year-over-year for July.
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The forecast was 2.8%, so we got a slightly better reading than expected. Even more importantly, core CPI (which excludes food and energy) came in at 3.1%, just above the 3% forecast and at its highest level since February.
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On a monthly basis, headline CPI was at 0.2%, while core CPI was at 0.3%.A key point here is that most of the increase came from housing costs, while energy prices fell — with gasoline down 2.2% in July and the overall energy index down 1.1%. This means the increases are more structural and not driven by short-term factors, which is particularly important for the Fed.
Meanwhile, indicators show that services such as medical care (+0.8%) and transportation (+0.8%) continue to exert upward pressure. The index for used cars rose by 0.5%, reinforcing signs that tariffs are starting to filter through to consumers.
MARKETS
So why did the markets cheer?
Because the market doesn’t want inflation too high or too low. It wants what we call the “Goldilocks scenario” — inflation that’s just right.Right now, the data shows inflation slowing at a steady pace, with growth at healthy levels. All this is enough for the Fed to feel comfortable easing monetary policy a bit.
The result?
- Dow Jones rose more than 480 points
- S&P 500 and Nasdaq hit new all-time highs
- The Russell 2000 (small-cap index) gained nearly triple the percentage increase of the S&P
And all because the market… smelled a rate cut.In fact, the probability of a Fed rate cut in September jumped to 94%, from about 85% before the data release. Traders are already betting on additional cuts in October and December.
So… all rosy? Not exactly.
As many analysts point out, there are still hot spots in the CPI. Prices for healthcare services, personal care, transportation, and household equipment have risen significantly. And Trump’s tariffs taking effect this month may not yet be reflected in the numbers — meaning we might see hotter prints in upcoming releases. Some analysts even warn this could be the calm before the storm. But until then… the market is in optimism mode.
P.S Of course everything depends on the September cpi because then we are going to have a clear picture of how tariffs will affect inflation.
Posted Using INLEO