John Veit
Vice President, J.P. Morgan Wealth Management
By John Veit and Cristina Dwyer
The July 2024 Consumer Price Index for All Urban Consumers (CPI-U) rose by 0.2% month-over-month (MoM), as expected, after falling by 0.1% in June. The year-over-year (YoY) CPI fell to 2.9% from 3% YoY in June,1 the smallest annual rise since March 2021. The easing in headline inflation suggests that inflation is trending in the right direction in the eyes of the Federal Reserve.
The softer inflation data, coupled with July’s weaker-than-expected employment report, highlights inflation and the labor market are coming into a better balance. These developments should increase the Fed’s confidence that inflation is on its way back to the 2% target and position the Fed to begin easing policy, most likely at the September Federal Open Market Committee meeting.
The monthly rise in July’s headline CPI was primarily driven by a 0.4% rebound in the shelter index and a 1% rise in motor vehicle insurance prices. The gain in the shelter index contributed to the majority of the monthly headline CPI increase – this means that rent is the primary reason for the difference between the Fed’s 2% target and the current inflation rate.2
The food index increased 0.2% MoM again in July and 2.2% YoY. The food away from home index rose 0.2% MoM while the food at home index rose 0.1% MoM. Out of the six major grocery store food group indexes, three saw monthly increases while three saw monthly declines. Notably, prices for meats, poultry, fish and eggs rose 0.7% MoM.3
The energy index was unchanged MoM, following a 2% decline in June, and rose by 1.1% YoY. Gasoline prices were unchanged MoM and fell 2.2% YoY.4 While energy prices were mostly unchanged in July, our strategists will keep a close eye on energy prices as they are historically a more volatile component of the inflation basket.
Our strategists expect slowing inflation, along with wages that remain supportive, to continue to enhance consumer purchasing power. This will likely bolster consumer spending in the near term.
Core CPI (excluding food and energy) rose by 0.2% MoM, following a milder 0.1% rise in June. Over the past year, core CPI rose by 3.2%, the smallest annualized increase since April 2021.5 Core prices were boosted by a rise in the shelter component, which accounts for about a third of the total inflation basket.
Shelter inflation rebounded in July, up 0.4% from the prior month, following a low 0.2% reading in June. Within the shelter component, owners’ equivalent rent (OER) increased by 0.4% in July and the rent index rose by 0.5%.6 Over the past year, shelter prices rose by 5.1%, driving over 70% of the annual gain in core CPI.
Overall, shelter inflation is on a downward trajectory, but the data is a reminder that the process will take time. The shelter component of inflation needs to decline further for rates to move closer to the Fed’s 2% target.
July’s uptick in the shelter index drove the core services index up to 0.3% MoM, the highest reading since April. The rise in core services prices was also driven by increases in motor vehicle insurance prices, while medical services and airfare prices declined. Core goods prices fell 0.3% MoM, the softest reading for core goods prices in a year, driven by falling prices for used vehicles and apparel.7
Going forward, our strategists expect core inflation to further moderate this year as the economy slows and the labor market becomes more balanced amid pressure from high interest rates.
At the FOMC meeting in July, the Fed announced that it would maintain the overnight federal funds rate at the current range of 5.25% to 5.5%. Notably, the Fed signaled it is leaving the door open to start cutting rates in September and the July inflation data reinforces that notion.8
Fed Chairman Jerome Powell reiterated that the Fed’s decision on the direction of rates continues to be made on a meeting by meeting basis with data leading the way.9 Following July’s weaker-than-expected jobs report and producer prices report, the cooldown in July’s inflation data should give the Fed further confidence that inflation is heading closer to its 2% target. This supports our strategists’ view that the Fed will likely cut interest rates in September.
For more information on how this economic data may impact your investment strategy, consult a financial advisor.
U.S. Bureau of Labor Statistics (BLS), “Consumer Price Index Summary.” (July 11, 2024)
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Board of Governors of the Federal Reserve System, “Federal Reserve Issues FOMC Statement.” (July 31, 2024)
Board of Governors of the Federal Reserve System, “Transcript of Chair Powell’s Press Conference Opening Statement” (July 2024).
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