CPI Inflation Rate Is Finally Falling — Much More Than Expected; Dow Jones Jumps

The CPI inflation rate has peaked and is now falling, which is good news for the Dow Jones.

As the consumer price index was lower than expected, the CPI inflation rate has finally retreated from its 40-year high in July. The core inflation rate, which excludes food and energy, has also decreased, decreasing the odds of an important Federal Reserve rate increase in September. Dow Jones Industrial Average rose sharply on Wednesday following the CPI report.

CPI inflation fell to 8.5% from 9.1% in June. This was due to falling gas prices, discounting at retail, online deflation returning and lower shipping costs. The consumer demand has shifted downwards while Covid's supply-chain issues are being resolved. Economists are expecting another low inflation reading in August, ahead of the Fed’s crucial meeting on September 20-21.

After a 1.3% increase in June, the CPI remained flat. The core CPI increased by 0.3% in June, which is a significant drop from the 0.7% rise seen in June. The core annual inflation rate remained at 5.9%. The core inflation rate of 6.5% in March was the highest since 1982.

Wall Street analysts expected that the consumer price index would rise by 0.2% in July as the annual inflation rate eased down to 8.7%. Core CPI is expected to rise 0.5% in the month. Core inflation was forecast to increase to 6.1%, up from 5.9%.

The rate of inflation in goods, excluding energy and food, has slowed down from the double-digit rises earlier in the year. Core goods prices increased by 0.2% over the past month. This brings the annual inflation rate to 7%, down from 8.5% last May.

The inflation in prices of non-energy services, which affects 57 percent of consumer budgets has not abated. Prices are up 0.4% from last month and 5.5% compared to a year earlier. The increase in the annual price was equal to June's 30 year high.

The inflation rate for non-energy services remained high as medical service prices rose by 0.4% in the last month. This brings the annual increase to 5.1%.

In July, shelter prices increased by 0.5% and reached a 30 year high of 5.7% compared to a previous year. This strength was due to the owners' equivalent rental rising by 0.6% in July and 5.8% compared to a year earlier. This was offset slightly by a monthly decline of 3.2% in hotel and motel rates.

The price of transportation fell by 0.5% per month, while airfares dropped 7.8%. Education and communication services prices also fell 0.1%.

The strong job market has not changed the outlook.

Aneta Marcowska, chief financial economist at Jefferies, wrote in a note on Friday that "core goods inflation should also decline in the coming month given the overwhelming evidence for easing supply-chain pressures." She expects that core services inflation will "remain stick, supported by tightness in the housing and labor market."

Dow Jones rose by 1.6% on Wednesday. The S&P 500 rose 2.1%, and the Nasdaq Composite 2.9%.

After Friday's positive jobs report, the Dow Jones rally lost some momentum. The financial markets have begun pricing in a quarter-point increase to 3.5%-3.75% range by the beginning of next year. The CPI report reversed the odds of a rate hike. According to CME Group’s FedWatch, the markets now have about 40% chance of a 75 basis-point increase in September.

Even though the stock market rallied through the session on Wednesday, the Treasury market lost much of its initial gains as yields rose from their lows following the CPI report. This suggests that the CPI report won't have a major impact on Fed policy.

After falling by 10 basis points early to 2.7%, the 10-year Treasury yield has now recovered to 2.79%. The 2-year Treasury rate, which is closely linked to Fed expectations, dropped 6 basis points, to 3.23% after falling to around 3.10% in the morning. The Treasury yield curve is still inverted with short-term interest rates higher than longer-term, which could be a sign of a recession.

The Dow Jones Industrial Average was down 10.9% as of Tuesday's closing price from its closing high in January, but it had risen 9.7% since its closing low in mid-June. The S&P 500 is down 14.1% since its high, but has risen 12.4% since its low of June 16. The Nasdaq is down 22.2% and has cut its losses by 17.4% from mid-June.

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Prices of used cars and trucks rose 6.6% over the past year, but fell by 0.4% in March. The used car inflation rate has dropped sharply since a 35.3% increase in March.

The global shortage of chips that has halted production for new cars boosted the demand for used vehicles. New vehicle prices increased by 0.6% in the last month and 10.4% over the past year. The 13.2% increase in April was the largest yearly rise since 1949.

Prices of energy have increased by 32.9% in the last year and decreased 4.6% for the month. AAA reports that the average national gasoline has dropped $1 per gallon or 20% since mid-June.

Food prices away from home increased 0.7% from June to July, and 7.6% compared to a year earlier. Last month, prices for food eaten at home rose by 1.3% and by 13.1% compared to a year earlier.

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