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First Cut: July CPI rises on gasoline, shelter, and medical costs

The Consumer Price Index was up 0.3% in July from June, and up 0.3% excluding food and energy. Food and beverage costs were up a scant 0.1%, while energy rose 1.3% mainly due to a sharp 2.5% rise in gasoline. Compared to the year-ago month the CPI was up 1.8%, two-tenths higher than the up 1.6% year-over-year for June. The core CPI was up 2.2% compared to July 2018 and was the fastest rise since up 2.2% in November 2018.

The CPI excluding shelter — which accounts for about 1/3 of the CPI basket of goods — was up 0.4% month-over-month, and up 1.0% compared to a year ago. Shelter costs continued to be a major source of upward price pressures. The shelter index was up 0.3% in July from June, and up 3.5% from the year-ago month.

Price increases for commodities remained soft at up 0.3% in July from June and up 0.4% from July 2018. It is from services that most of the increases are coming. Services were up 0.3% month-over-month and up 2.6% year-over-year. Consumers are consistently paying more for medical care (up 3.3% year-over-year) and health insurance (up 15.9%).

While the PCE deflator is the FOMC’s preferred measure of inflation, the CPI still has a lot of weight for policymakers, especially as the PCE deflator still appears to have some lingering impacts from a few special factors. The July CPI data hints that underlying inflation isn’t all that far below the Fed’s 2% objective. If Chair Jerome Powell said that a need to support price stability was one of the two main reasons for a rate cut on July 31, that may not be as urgent by the time the September 17-18 FOMC meeting rolls around. Given the present strength in the labor market, unless there are signs of substantive deterioration in the US economy, it may lessen the chance of another rate cut then.

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