The Consumer Price Index (CPI) was unchanged in July, providing further evidence that inflation pressures have eased considerably in the past year as global growth has cooled. After peaking at 3.9% in September, the one-year change in CPI continued to trend lower, easing to just 1.4%. Despite the expectation that food prices increased in July, the actual increase was a modest 0.1%, while energy prices declined for the fourth consecutive month. Although food and energy costs are excluded from core measures, the core CPI increased by just 0.1% in July, while the one-year change dipped to 2.1%.
With inflation and inflation expectations still very much in check, the Fed appears to have increasing flexibility to announce additional easing if the economy were to falter further. The Fed has acknowledged that the economy is weakening, but their decision to not announce further easing at their recent meeting is telling. While core inflation has been in decline over the past few months, it remains modestly above the Fed’s 2% target, undoubtedly contributing to the Fed’s lack of urgency. The Fed may also be waiting for evidence of a more pronounced deterioration in job market conditions to take aggressive action.
Nonetheless, the Fed is on the clock if they wish to maintain their historical stance of attempting to remain apolitical. With November closing in, they are not likely to want to take action too close to election day. The Fed will be closely watching data over the next few months to decide whether or not to take preemptive action at the September policy meeting.
We remain cautious in our economic outlook, but recognize that policy actions are a wild card. While the markets are anticipating further easing by the Fed and other global central banks, there is certainly a risk that sentiment could shift. Any sense that policymakers are not acting decisively to get out in front of the problem would not be well received by investors; conversely, markets could also react positively to unexpectedly aggressive easing measures. Along with the many other sources of uncertainty troubling investors, this sets up the potential for market volatility to flare again in the months ahead.