Select Page

The Consumer Price Index rose 0.1% in July from June. CPI headline inflation is now running at a 1.7% annual rate, below the Federal Reserve’s target of 2% inflation.

The core inflation rate, which excludes food and energy prices, rose 0.1% in July and is also up 1.7% year over year.

The debate now at the Federal Reserve and among economists is whether or not this low inflation rate is permanent or transitory.

There’s something for both sides in today’s numbers. A record drop in the price of lodging away from home (4.2% from June) and a 0.5% drop in the price of a new car (the biggest drop since 2009) look like they might be cyclical. Certainly auto sales look to have peaked.

But another monthly drop in energy prices could be called transitory. Energy prices fell 0.1% from June with natural gas prices falling 2.3%. The energy price index is, however, up 3.4% year over year.

I think this continued weakness in the inflation numbers keeps a Federal Reserve interest rate increase at its September meeting in the very unlikely category. Recent speeches by Fed members continue to point to an announcement on a start of efforts to reduce the size of the Fed’s $4.4 trillion balance sheet next month. A reduction in the Fed’s balance sheet would be equivalent to a tightening of the money supply–although at the discussed rate of $10 billion a month, it would be a more modest tightening than a 25 basis point increase in interest rates.

In other economic news released this morning, hourly earnings adjusted for inflation rose 0.7% from July 2016. The June annual rate was 0.9%.