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America’s Closely Watched CPI Inflation Report Comes In Lower Than Expected, Stocks Fly: 3 Things To Know

America’s Closely Watched CPI Inflation Report Comes In Lower Than Expected, Stocks Fly: 3 Things To Know

CPI

Volunteers load cars with food boxes at the St. Mary's Food Bank, June 29, 2022, in Phoenix. (AP Photo/Ross D. Franklin)

The consumer price index (CPI) for July rose 8.5 percent, a slower pace than the 9.1 percent annual rise in June, sending stock prices rallying.

The Nasdaq Composite Index is back in bull territory, ending the longest Nasdaq bear market since the financial crisis, Wall Street Journal reported.

The CPI, which tracks the prices consumers pay for a variety of goods and services, went up less than expected. Dow Jones economists expected headline CPI to increase 8.7 percent on an annual basis.

The report was good news for workers, who saw a 0.5 percent monthly increase in real wages. Inflation-adjusted average hourly earnings are still down 3 percent from a year ago.

Here are three things to know.

Lower energy prices are being credited for lower-than-expected CPI

Energy prices fell by 4.6 percent and gasoline declined 7.7 percent but the index for electricity
increased, rising 1.6 percent, according to the Bureau of Labor Statistics. Electricity prices are up 15.2 percent from a year ago and natural gas is up 30.5 percent.

Food prices saw a 1.1 percent monthly gain and shelter costs rose by 0.5 percent for the month, according to the Bureau of Labor statistics.

Indexes that declined in July include airline fares, used cars and trucks, communication, and apparel. Airline fares are down 1.8 percent for the month and 7.8 percent compared to a year ago.


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Energy prices have increased 32.9 percent for the year ending July, a smaller increase than the 41.6-percent increase for the period ending June. Food prices are up 10.9 percent over the last year, the largest 12-month increase since the period ending May 1979.

As of Aug. 10, 2022. Seasonally unadjusted. Chart: Gabriel Cortes / CNBC Source: U.S. Bureau of Labor Statistics

Stock markets loved the CPI report

Futures tied to the Dow Jones Industrial Average rose 535 points and government bond yields went down sharply.

The S&P 500 added 88 to 4210, a 2.1 percent rise. Nasdaq rose 361, or 2.9 percent, to 12854, ending a bear market – a decline of 20 percent from a recent high – that was the longest since 2008. A bull market marks a rise of 20 percent or more from a recent low.

Inflation is still close to the highest levels since the early 1980. “Things are moving in the right direction,” said Aneta Markowska, chief economist at Jefferies. “This is the most encouraging report we’ve had in quite some time.”

Generally, when the Federal Reserve raises interest rates, it causes the stock market to go down.

The Federal Reserve has raised benchmark borrowing rates by 2.25 percentage points so far in 2022 with indications that more are coming. While inflation has risen, gross domestic product fell for the first two quarters of 2022, meeting a common definition of recession. The combination of slow growth and rising prices is associated with stagflation, CNBC reported.

Wednesday’s CPI report could take some heat off the Fed, according to CNBC.

The slower inflation numbers “egged on investors betting that softening price trends will allow the Federal Reserve to moderate the pace of the rate-increase campaign that has rattled markets for much of 2022,” Wall Street Journal reported.

“At the very least, this report takes the pressure off the Fed at the next meeting,” Markowska said. “They’ve been saying they’re ready to deliver a 75 basis point hike if they have to. I don’t think they have to anymore.”

Inflation may be shifting to structural vs. transitory problem

While markets and some government officials have dismissed inflation as short-term and transitory, others argue that a more fundamental structural shift is taking place.

The economy may have entered a new inflationary era characterized by persistent upward price pressures, wrote Vivekanand Jayakumar, an associate professor of economics at the University of Tampa. “Nobody knows the answer for sure, but we shouldn’t underestimate the probability that we are in the midst of a consequential inflation regime change,” Jayakumar wrote in an opinion piece for The Hill.

“The real issue is you’re not seeing wages grow as fast,” said David Neuhauser, chief investment officer at Livermore Partners, in a June 2021 “Squawk Box Europe” interview. “Ultimately that is going to start to pinch the consumer and as you know, the consumer is 70 percent-plus of the economy.”

If inflation is indeed here to stay, as Livermore Partners anticipates, Neuhauser suggested this will cause the Fed to put the brakes on its accommodative monetary policy.  

As companies struggle to attract workers, they will offer higher wages and bonuses. “That is ultimately going to increase the price of their goods and services, which will of course increase the prices to consumers,” he said.