Market Update: Price Relief
The July Consumer Price Index (CPI) data was a crescendo to a string of better news for investors. The closely watched inflation metric showed that there were not any price gains in July (compared with a 1.3% increase in June), and even after stripping out food and energy costs, prices only rose by 0.3%.
Falling oil and gasoline prices had a big impact with prices at the pump declining for nearly two months. In all, motor fuel costs fell by 7.6% and airline costs fell 7.8% in July giving travelers some relief.
Lower energy prices should continue to flow through the supply chain. One example being global shipping costs which are down almost 40% from their peaks, and producer prices (which measure inflation-facing businesses and manufacturers) was negative in July relative to June. All of this suggests that goods inflation should continue to fall over the next few months.
But it wasn’t just energy. The share of components within the CPI index that saw price declines was the highest since early 2020.
The July CPI report is the latest (and most important) indicator that suggests price pressures have peaked. The pace of wage gains has cooled no matter which data series you look at, consumer expectations for future inflation are falling, and market-based measures of inflation remain anchored.
While all of this is encouraging, we aren’t out of the inflation woods just yet. Prices are still much higher than they were a year ago, and core inflation of 0.3% a month still implies an annual pace of inflation well above the Federal Reserve’s target of about 2%. Housing costs continued to rise and will likely do so for a while longer. Food prices were up a staggering 1.1% in July and are now almost 11% higher than they were last year, posing a burden to many families.
Falling oil and gasoline prices has a big impact with prices at the pump declining for nearly two months.
We expect the Fed’s hiking cycle to continue until they see additional convincing evidence that inflation is moving back toward its target, even if the hikes are at a slower pace than the 75 basis point moves we saw in July and August.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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privatebank.jpmorgan.com/los-angeles
