THE BASIS POINT

CPI for July Up 0.8%, YOY Up 5.6%, Biggest Inflation Spike Since 1991 Due Mostly to Oil

 

The US Consumer Price Index was up 0.8% in July and up 5.6% year-over-year through July. This was the largest YOY spike since January 1991, and is due mostly to the oil price spike we had during early summer. Normally rate markets would spike on this inflationary news, but rates have been stable today because oil has since come off it’s $140+/barrel highs and is now trading around $115/barrel. So as we look at future CPI figures, markets are for now betting the figures will improve.

If you exclude oil and food prices from the report, Core CPI was up 0.3% in July and up 2.5% year-over-year through July. These numbers are still above the Fed’s comfort zone of 1-2%, but with more housing-induced economic weakness on the horizon, the Fed feels that inflation could moderate and come within their comfort zone. Right now the Fed Funds rate is 2%, so inflation-adjusted or “real” interest rates are -0.5%.

As for the debate about Core versus Overall inflation: It seems difficult to look at the Core number if food and gas account for 33% of inflation. But this summer’s spike then drop in oil prices is the reason there are Core versus Overall readings. Food and Energy are considered to be volatile enough to leave off, or at least look at separately.

 

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