FRB Hawkdown
It might be time to check on the Fed hawks; their momentum seems to have diminished.
On Moderate inflation report, the figures released on Wednesday reinforced previous data, indicating that the Federal Reserve likely won’t need to increase interest rates this year.
The consumer price index (CPI) rose by 0.1% in July compared to June, following a 0.4% drop in the previous month. While the year-over-year increase remains high at 3.4%, this marks the second consecutive month of decline. The current three-month annual rate is notably low at 0.5%. This points to us being under the Fed’s PCE inflation target of 2%, despite the Personal Consumption Expenditure Index running high compared to the CPI.
Core CPI, which excludes food and energy, increased by 0.2% this month, showing a year-over-year rise of 2.4%. Currently, the three-month annualized core CPI stands at 1.6%.
Over the past three months, the headline CPI has hit its lowest level since June 2020—a time when prices were dropping amid pandemic restrictions. The three-month annualized core CPI is the lowest since July 2024, just before the Fed began decreasing interest rates.
The median CPI rose by 0.3%, which is slightly elevated but not alarming. The year-over-year increase stands at 2.7%, while the annualized rate for the last three months is 3%. The Cleveland Fed trimming average at 16% indicates a monthly figure of 0.2% and 2.6% year-over-year, with an annualized rate of just 2% for three months. These suggest that underlying inflation is unlikely to push prices beyond the Fed’s target.
Labor pains don’t imply rising inflation
Labor market metrics are also influencing decisions on interest rate hikes. The average hourly wage increased by just 0.05%, with a three-month annualized rate rising at 2.3% in July. This aligns with the Fed’s objectives—though perhaps not exceeding them. A drop in employment hints at low inflationary pressures from the labor sector.
Corporate inflation expectations remain moderate. The Atlanta Fed indicates that unit prices are projected to rise by 2.2%, which is above the pre-pandemic average, although the Fed often failed to meet its target during that period. Current figures seem acceptable.
The hawkish claims from the Fed president seem increasingly out of touch. Concerns about inflation appear rooted in potential disruptions from one-off supply shocks, but such events don’t seem to be materializing. The median anticipated interest rate for the next five years is around 3%, which historically aligns with the Fed’s aims. Expected inflation over the next five years is 2.4%, drawing from studies by the Cleveland Fed, Treasury yields, and inflation-protected bond prices. So, there doesn’t seem to be evidence to support these fears.
Beth Hammack President of the Cleveland Fed—who advocated for rate hikes during the last meeting—seemed puzzled by a recent LinkedIn update discussing inflation in his district.
Now is the time for action.
There is no strain in the mission. Policies aren’t restrictive. Delaying action to align inflation with the 2% goal will make it more difficult and costly for Americans.
As inflation has increased for six consecutive years, it’s already acting as a financial burden for District 4 residents.
• A Sandusky, Ohio restaurateur had to drop his building insurance after premiums tripled in three years.
• Worcester Co., a mid-sized Ohio manufacturer, can’t raise prices despite the uptick in raw material costs.
• And, families in Erie, Pennsylvania are telling their kids they can’t afford the ice cream they want.
While these points undeniably reflect the struggles linked to inflation, it’s essential to recognize signs of disinflation. A restaurant owner unable to afford insurance indicates that his income can’t sustain current pricing. Similarly, Ohio manufacturers’ inability to raise prices suggests that demand isn’t strong enough to justify surging raw material costs. Who can’t even buy ice cream for their kids? This points more toward disinflation than inflation.
It’s vital to remember that the Fed’s inflation target reflects its commitment to maintaining price stability. It focuses solely on consumer inflation. By monitoring how inflation impacts household spending—as illustrated by the Personal Consumption Expenditure Price Index—it sheds light on consumer behavior. Some Fed officials view alternative measures targeting corporate inflation through input costs, but that’s not the strategy currently adopted. Consumer inflation remains central to Fed policy.
We have one more CPI report and a PCE price index coming up before the Fed’s next meeting. A significant rise in inflation would be necessary to advocate for a rate hike in September, especially given the recent employment and wage stagnation. It’s likely the Fed will maintain current interest rates at its upcoming meeting.
