S&P 500, Nasdaq jump higher as key inflation data comes in cool

US

Tuesday’s PPI data serves as the latest to build the case for Fed rate cuts. It will also set up one of the most important data points shaping future Federal Reserve interest rate policy: July’s Consumer Price Index (CPI).

The inflation report, set for release at 8:30 a.m. ET on Wednesday, is expected to show headline inflation of 3.0%, unchanged from June’s reading.

Over the prior month, consumer prices are expected to have risen 0.2%, an uptick from the prior month’s 0.1% decline as energy prices are largely expected to pick up again.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in July are expected to have risen 3.2% over last year, a slowdown from the 3.3% annual increase seen in June. Monthly core prices, however, are expected to rise 0.2% compared to 0.1% increase in June, according to Bloomberg data.

File – A shopper peruses cheese offerings at a Target store on Oct. 4, 2023, in Sheridan, Colo. Inflation is easing slightly, but grocery prices are still high. (AP Photo/David Zalubowski, File) (ASSOCIATED PRESS)

“CPI in June surprised to the downside,” Bank of America economist Michael Gapen wrote in a note ahead of the report. “We expect some of that surprise to reverse in July.”

To note, June’s data was the first time since May 2020 that monthly headline CPI came in negative. It was also the slowest annual gain in prices since March 2021.

While July’s inflation data will likely not be “quite as low as June, it is in line with prior trend in deflation and should meet the Fed’s benchmark for beginning rate cuts in September,” Gapen said.

Core inflation has remained stubbornly elevated due to higher costs of shelter and core services like insurance and medical care.

Shelter prices are expected to reverse June’s deceleration after the index for rent and owners’ equivalent rent (OER) posted their smallest monthly increases since August 2021. Owners’ equivalent rent is the hypothetical rent a homeowner would pay for the same property.

Non-housing services also edged down in June, “owing in large part to a plunge in airfares. For July, however, we expect the decline in airfares to be much more moderate,” Bank of America’s Gapen noted.

“Non-housing services inflation should moderate over time given cooling services wage inflation; however, a sustained period of deflation is unlikely,” he warned.

Read more here.

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