Another cool July inflation reading
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Inflation has been stubbornly high for half a decade. But July, at least, brought some relief.
The big picture: With a lively debate underway at the Federal Reserve over whether to raise interest rates, the latest run of data — a soft jobs report Friday and benign readings on inflation this week — allows for patience.
- Still, employment and inflation data for August are due out before the mid-September Fed meeting.
By the numbers: The Producer Price Index was flat in July; excluding food and energy, it was up 0.2%. Both numbers were a tick below analysts' forecasts.
- Over the last 12 months, PPI is now clocking a 4.7% rise, or 4.2% for core.
- It followed a similarly soft July Consumer Price Index reading earlier this week.
- June PPI, however, was revised upward, to a 0.1% decline (previously a 0.3% decline), adding an asterisk to the overall solid news.
What they're saying: "The soft PPI reading for July points to reduced inflationary pressure for businesses in coming months," Nationwide senior economist Ben Ayers wrote in a note.
- "While the renewed rise in fuel costs is concerning, input costs beyond energy are cooling which should enable most firms to absorb a temporary increase in fuel-related expenses."
The intrigue: Portfolio management services prices alone soared 6.5% in July. That's one of the components of PPI that, in current methodology, feeds directly into the Personal Consumption Expenditures Price Index that the Fed targets.
- But the component creates misleading swings in reported inflation, because higher asset prices mechanically translate into higher prices, given that many investors pay a set percentage of their portfolio value in fees.
- Indeed, PCE methodology is set to be revised on Sept. 30 to eliminate the distortion.
What's next: The next big economic news event likely to shape expectations for Fed interest rate policy is the Kansas City Fed's Jackson Hole symposium, which begins Aug. 27.
