On July CPI: So What will Powell Find to Hate About It?

The data, and our opinions, do not matter: Powell matters. Base effects caused year-on-year headline CPI to rise slightly, even with a below-target rate for the month. Core CPI lags, so comparables were easier – and the month’s rate was even further below target. Our favorite measure, core ex-OER, is in outright deflation for the month, and at a mere 3% year-on-year.  Powell’s favorite measure, core services ex-shelter, a small subset of index weight, is above target for the month, but at its lowest year-on-year reading in 14 months. Inflation is done. Deflation is starting to manifest. Powell won’t likely declare victory at Jackson Hole, but could start to shift the narrative from how high the funds rate will go to how long it will have to stay where it is. The curve expects no more hikes, and we agree. The curve expects the first cut next March. We think it will be sooner as deflation becomes obvious.