CPI Report: Falling Probabilities of a September Rate Hike

Posted by Jeffrey J. Roach, PhD, Chief Economist

Thursday, August 10, 2023

Additional content provided by Colby Hesson


  • Consumer prices rose 0.2% in July, pulling the annual rate of inflation up to 3.2% from 3.0% last month.
  • Not surprising, the largest contributor to the monthly increase in prices was shelter costs.
  • Monthly core inflation, which excludes food and energy, rose 0.2% for the second consecutive time, as core inflation has downshifted in recent months.
  • Inflation is still considerably above the 2% level where the Federal Reserve (Fed) would like to see it but the trajectory is encouraging.
  • So far, the data suggest the Fed will likely pause at the next meeting but no guarantees about the meeting after that.

Bottom Line: Core inflation is getting less sticky, but for the Fed to declare victory on inflation, it is imperative it unwinds at a faster and more decisive pace. The Fed’s dove versus hawk tug-of-war appears now to be predicated on an ‘insurance’ rate hike later this year, which according to the hawks will help keep inflation expectations anchored. Although the CPI is moving in the right direction, it doesn’t mean another rate hike this year is out of the question, especially with gasoline prices rising. The probability of a rate hike in September is merely 10%, over 8 percentage points lower than this time last week according to the futures market.

The July Consumer Price Index (CPI) data provides an updated view of the inflation situation in the United States. While certain components of the report indicate inflation is slowing, there are underlying variables that continue to influence the total rate. According to the July CPI report, consumer prices rose by 3.2% year over year, a minor increase from the 3.0% annual rate recorded in June. Although this is a reduction from the high levels seen in 2022, it is crucial to remember that inflation remains considerably above the Fed’s 2% target.

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The core CPI, which includes volatile food and energy costs, also slowed slightly, with a 12-month rate of 4.7%, down from 4.8% the previous month. This decrease in core inflation shows some stabilization, but it is critical to understand the variables that are contributing.

Shelter expenses rose by 0.4% in July, accounting for a large share of the overall increase in consumer prices. Notably, shelter expenses increased by 7.7% year over year, underscoring the housing sector’s continuous pressure. This factor is critical in the inflation equation because housing costs influence the consumer price index and thus the total inflation rate. Rent prices continue to rise but at a decreasing rate.

Despite a spike in crude oil prices and increased gas prices during the month, energy prices rose by only 0.1% in July. Used vehicle prices decreased by 1.3%, while medical care services decreased by 0.4%. Airline fares, which had fluctuated significantly owing to the pandemic, declined by 8.1% in July, continuing the trend begun in June.

The CPI report illustrates the continuous dynamics of consumer demand, with a shift away from goods and toward services. Restaurant prices have continued to climb at a rapid pace, showing robust consumer demand in that industry. This is consistent with a broader trend seen in recent months, in which customers have indicated a preference for experiential spending, which has influenced price dynamics in a variety of service industries.

The report also sheds light on the possible influence of housing on inflation. While housing costs have been a key contributor to the growth in consumer prices, there are signs the housing sector may cool. Increased multi-family development activity, driven by an increase in condo and apartment building projects, may result in an increase in the supply of multi-family apartments. This increase in supply may help lower rents, thereby slowing housing-related inflation.

Market reactions to the July CPI figure were overall favorable, with Dow Jones Industrial Average futures up more than 200 points and Treasury yields mostly lower. These replies indicate market participants perceive the report as showing inflation is on the rise, which may give the Fed the leeway to maintain current interest rates in the short term.

The rising level of inflation, particularly in housing expenses, presents a challenging problem as the Fed contemplates its next measures. While the overall trend in inflation appears to be positive, the Fed is likely to stay cautious. The dual mandate of the central bank of price stability and maximum employment requires careful analysis of the changing economic landscape.

When the August CPI report is released, it will be closely analyzed to see if the patterns seen in the July report continue. It will give useful information about whether the current decrease in inflation rates is sustainable or if there are new events that could influence the Fed’s policy decisions.


While the July CPI report indicates a good trend in inflation, it is important to note inflation remains above the Fed’s objective and the central bank faces a delicate balancing act. Continuous monitoring of inflation is required, and the Fed’s choices in the next few months will be critical in navigating the complicated economic situation. Although the CPI is moving in the right direction, it doesn’t mean another rate hike this year is out of the question, especially with gasoline prices rising. However, we think the Fed will pause during its September meeting but keep everything on the table for the November meeting. Investors should find plenty of opportunities in this market despite the disproportionate easing in inflation pressures. Cyclical sectors performed well today as inflation is easing and so far, without creating any obvious cracks in the economy.


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