Headline U.S. Consumer Price Inflation was expected to slow from +9.1% YoY to +8.7% YoY in July; however, as of this morning’s release, CPI declined more than anticipated, coming in a +8.5% YoY and +0% on a MoM basis, ending a 16-month streak of MoM gains. In addition to headline CPI, Core CPI, which excludes food and energy, was expected to increase from +5.9% YoY to +6.1% YoY in July; however, Core CPI remained flat for July and came in under the +6.1% estimate.
The main reasons for the large decline in CPI was a result of Energy and Goods prices slowly substantially as energy prices tumbled MoM driven by lower gasoline prices. Shelter costs did continue to rise, as this is one of the most lagging indicators in the basket of prices followed. These increased shelter costs were offset by a slight reduction in Used Car prices. Finally, and possibly one of the most important items not discussed, is the real average weekly earnings continues to plunge, now down 16 straight months as inflation eats away at any wage gains.
Immediately following the release, equity markets shot up, bond yields sank, and the odds of a 75 bps rate hike in September declined meaningfully. Whether or not this is enough to cause the U.S. Federal Reserve to pause or pivot is yet to be seen, but the market surely liked the print.