Trillium News
August 15, 2022

Inflation Slowed in July. How Will the Fed Respond?

Inflation Slowed in July. How Will the Fed Respond?Inflation Slowed in July. How Will the Fed Respond?

Dear U.S. Environmental Protection Agency Administrator and Members of Congress,

July’s inflation report provided some much-needed relief for consumers and policymakers, but does it indicate that inflation has peaked and that a Fed pivot on interest rates will follow?

July’s inflation report provided some much-needed relief for consumers and policymakers, but does it indicate that inflation has peaked and that a Fed pivot on interest rates will follow?

July’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports were a welcome change in direction. July’s CPI was unchanged on a seasonally adjusted basis after rising 1.3% in June, and the PPI declined 0.5% following a 1.0% increase in June. Core CPI remained elevated—still well above the Fed’s 2% inflation target.

While inflation softened more than expected, it is still abnormally high. Declining energy prices offset increases in food, housing and rent. Home prices have hit new highs while available inventory is below historic levels. Rent, which comprises a large percentage of overall inflation, continues to soar. The labor market also remains strong despite other economic weaknesses. The unemployment rate has returned to pre-pandemic levels and wage growth ticked higher than expected according to last week’s report.

How will the Fed interpret and respond to this data? Based on our current work, we believe inflation could be high for some time and that the Fed will continue to see cause for concern. In short, no pivot in sight on rate hikes in the foreseeable future.

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