The July Consumer Price Index (CPI) inflation report released on Wednesday was in line with expectations and provided a clear path forward. Fed The benchmark interest rate was lowered for the first time since the aggressive interest rate hike cycle began in early 2022.
The history of global pandemics shows that inflation rises first, but deflation ensues later as supply chains malfunction in this environment. The disinflation that usually follows a pandemic fades away without deflation.
With the national unemployment rate rising, job openings falling, jobless claims rising and wage growth slowing, the Federal Reserve’s first interest rate cut of the cycle is scheduled for next month. Even with its first interest rate cut, the Fed is still pursuing restrictive policies and is far from a neutral policy. So, let’s take a look at today’s inflation report and see why this seals the deal for a rate cut in September.
from U.S. Bureau of Labor Statistics (Bureau of Labor Statistics): The Consumer Price Index for All Urban Consumers (CPI-U) rose a seasonally adjusted 0.2% after falling 0.1% in June. … Over the past 12 months, the all-items index grew 2.9% before seasonal adjustments.
The next sentence of this report is even more interesting:
The housing index rose 0.4% in July, accounting for nearly 90% of the monthly increase in all project indices.
As the chart below shows, housing inflation is slowly declining, but we all know this data set is lagging a bit. The Fed understands this, which is why it has been talking so much about CPI inflation recently, knowing that CPI has more anti-inflation variables than personal consumption expenditures (PCE) inflation data. house line Editor-in-Chief Sarah Wheeler and I talked about this recently in preparation for Inflation Week.
Labor fights inflation
Remember, the Fed cares more about core inflation – and housing accounts for 45.1% of CPI inflation, so it’s very important. Housing inflation is cooling, and core inflation must follow suit. As wage growth slows and more housing becomes available, it will be difficult for inflation measures to accelerate as they have during the COVID-19 pandemic.
In June 2022, the overall CPI inflation rate exceeded 9%. However, although inflation has not been the main driver of recent interest rate cut discussions, it has provided a clear path to a rate cut due to increasingly weak labor data.
Obviously, we’ve been making good progress on inflation for some time without cutting rates, but we’re finally going to have our first rate cut in September. This is happening because the labor market is softening, according to data tracked by the Federal Reserve.
That’s not just because the unemployment rate rose to 4.3% in July from 3.5% a year ago. Job openings are down and turnover rates are at pre-COVID levels. At the same time, wage growth has slowed and is getting closer to the Fed’s 3% annual target.
The recent drop in mortgage rates is happening as labor data cools. If the Fed initiates a rate cut cycle and labor data softens, mortgage spreads could improve further in 2024 and 2025.
The first rate cut is coming as mortgage rates are already 1 percentage point below their recent peak. Looking ahead to the remainder of 2024 and into 2025, if labor force data continues to be weak, it will increasingly take the lead.
With the overall CPI inflation rate now below 3% and below the running average of 3.3% since 1914, it is time for the Fed to ensure that there is no breakthrough in labor data and avoid a jobless recession.
