S&P 500, Nasdaq rise after key inflation data

Tuesday’s producer price index data is the latest evidence that the Federal Reserve is on track to cut interest rates. It will also be one of the most important data points shaping the Fed’s future interest rate policy: the July consumer price index.

The inflation report, due at 8:30 a.m. ET on Wednesday, is expected to show the headline inflation rate at 3.0%, unchanged from June’s reading.

Over the previous month, consumer prices are expected to have risen 0.2%, a slight increase from the previous month’s 0.1% decline, as energy prices are largely expected to rise again.

On a “core” basis, which strips out the more volatile costs of food and gas, prices are expected to rise 3.2% in July from a year earlier, a slowdown from the 3.3% annual increase seen in June. However, monthly core prices are expected to rise 0.2%, compared with a 0.1% gain in June, according to Bloomberg data.

“The June CPI surprised everyone with a downside. We expect some of that surprise to reverse in July,” Bank of America economist Michael Gapen wrote in a note ahead of the report.

It is worth noting that the June data was the first time since May 2020 that the monthly CPI came in negative. It was also the slowest annual rise in prices since March 2021.

While July’s inflation data is unlikely to be “as low as June’s, it is consistent with the previous trend of deflation and should meet the Fed’s criterion for starting to cut interest rates in September,” Gaben said.

Core inflation has remained stubbornly high due to rising costs of shelter and basic services such as insurance and medical care.

Shelter prices are expected to reflect a June slowdown after the rent index and owner-equivalent rent (OER) posted their smallest monthly increases since August 2021. Owner-equivalent rent is the hypothetical rent a homeowner would pay for the same property.

Nonresidential services also declined in June, “largely due to lower airfares. But in July, we expect the decline in airfares to be more moderate,” Bank of America’s Gapen noted.

He warned that “inflation in non-residential services is expected to slow over time in light of slower inflation in service wages; however, we are unlikely to see a prolonged period of deflation.”

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