by Jeff Weniger, CFA Head of Equity Strategy & Kevin Flanagan Head of Investment and Fixed Income Strategy, WisdomTree
One of the most noteworthy data points during July was the June CPI report. While some moderation in price pressures was expected, the actual ‘cooling’ in inflation that was reported was greeted as a long sought after welcome development by the financial markets. The natural question becomes whether this was the start of a trend, an anomaly of sorts or something in between.
Investors should always remember that one month’s worth of data should not be viewed too conclusively. Interestingly, this was a sentiment Chairman Warsh and other Fed officials espoused in the wake of the CPI release. While it was certainly refreshing to see a better-than-expected inflation report given the tariff and war-related data investors had been witnessing for over a year, it is important to provide some perspective for sure.
There is no question the month vs month negative headline figure of -0.4% was directly impacted by the plunge in energy prices that occurred in June as a result of the Memorandum of Understanding (MOU) between the US and Iran. According to the Bureau of Labor Statistics (BLS) the energy component within CPI fell -5.7%, led by declines between -9% to -10% for fuel oil and gasoline. Electricity also got into the mix, declining by -1.0% in June.
In our opinion, the ‘better’ news was that core inflation was unchanged month-over-month, pushing the year vs. year reading down 0.3 percentage points to +2.6%. This represented the first lower reading on a monthly basis last November and brought the increase back down towards the level that was being posted pre-Middle East war.
Can this trend be continued or was the June data more of a ‘one-off? That’s the question both the money and bond markets as well as the Fed are asking themselves. Well, based upon recent Treasury market trading activity and fed-speak, it would appear as if the expectation is that it is more of the latter.
From a headline basis, it is highly doubtful we are going to see another month-over-month decline any time soon, unless of course there is a surprising end to hostilities in the Middle East on the immediate horizon. Energy prices have retraced a good portion of their June decline here in July, as West Texas Intermediate (WTI) crude oil rose back to around $90 per barrel, or $20 higher than last month’s low watermark. In addition, according to the AAA, the average national price for gas at the pump has risen by almost 20 cents per gallon from a month ago, as of this writing.
What about core inflation? A couple of things stand out. The first is that the hotels and airfare components had noteworthy pullbacks from their prior months’ increases and will more than likely not be duplicated. The seemingly ‘ever-sticky’ rent categories also saw notable drops from their April/May increases and arguably won’t see a repeat performance going forward either.
Our base case does not look for a surge in price pressures to occur in the months ahead. In fact, the ‘tariff’ effects do look to be subsiding in a meaningful way. However, inflation readings above the Fed’s 2% target threshold do seem the more likely path going forward.
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