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July CPI Nearly Matches Expectations, But Stubborn Core CPI Raises Doubts About Deeper Rate Cuts; Stocks Mixed

AInvestWednesday, Aug 14, 2024 8:49 am ET
1min read

As expected, July's CPI data provided further evidence of a moderate slowdown in inflation, though the market wasn't significantly surprised, raising questions about the likelihood of a deeper rate cut in September. The CPI increased by 0.2% month-over-month, matching estimates, while the year-over-year figure dropped to 2.9%, below the expected 3%, marking the lowest level since April 2021. Core CPI, excluding food and energy, also grew by 0.2% month-over-month and matched the expected 3.2% year-over-year increase.

This data follows Tuesday's moderate slowdown in the Producer Price Index (PPI), leading the market to anticipate a similarly slower CPI. However, the market showed some initial ambiguity following the data release since the surprise was not that significant. The S&P 500 futures were and Nasdaq 100 futures rose by 0.2%.

The FedWatch tool still shows an even probability of a 25 basis points or 50 basis points cut in September, with a 52% greater chance of a 25 basis points cut in the next meeting. The moderate slowdown in inflation suggests that the Fed might be more willing to adopt a gradual rate cut, as it points to a less aggressive cooling of the economy.

According to the report, the index for shelter rose 0.4% in July, accounting for nearly 90% of the monthly increase in the all-items index. The energy index was unchanged over the month, after declining in the two preceding months. The index for food increased by 0.2% in July, consistent with June's increase. The food away from home index rose by 0.2% over the month, while the food at home index increased by 0.1%.

Though CPI dipped below 3% year-over-year this time, core CPI, which the Fed focuses on more closely, shows some stubbornness. Several indexes of core CPI saw increases in July, including shelter, motor vehicle insurance, household furnishings and operations, education, recreation, and personal care. Conversely, the indexes for used cars and trucks, medical care, airline fares, and apparel were among those that decreased over the month.

The stubborn core CPI may prove that the Fed might take a more cautious approach to rate cuts since the path to 2% inflation is still tough, along with rising unemployment. So far, a 25 basis points cut sounds safer and could put some pressure on tech investors.

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