CPI Report in July Enhances Probability of Rate Decrease: Expert Insights
The latest Consumer Price Index (CPI) report has been released, revealing a 0.2% month-over-month increase in Headline CPI, a slower rise compared to June's 0.3%. This increase, however, was primarily driven by the shelter sector.
Despite the rise, the overall inflation picture remains under control, according to Daniel Siluk, Head of Global Short Duration & Liquidity at Janus Henderson Investors. The July CPI report reinforces this view.
Core CPI, which excludes volatile food and energy prices, was up 0.3% month over month, resulting in a 3.1% annual increase. This core CPI figure supports the Federal Reserve's belief that the tariff effect on price levels will mostly be transient.
The tariff policies in 2025 are contributing a modest but noticeable upward pressure on inflation. According to a consensus among Wall Street experts, this inflationary impact is estimated to be around 2%, including a 0.5% inflation boost as directly attributed by Federal Reserve estimates.
Some categories like clothing and textiles have seen disproportionately higher price spikes of 17-40% due to tariffs. However, many experts believe this inflationary pressure to be short-lived, largely due to an anticipated economic slowdown that may provide the Federal Reserve with the opportunity to cut interest rates in the near term.
The Fed's policy stance is highly data-dependent, and with inflation contained and labor market softness increasingly evident, the emphasis will now be skewed toward employment, according to Alexandra Wilson-Elizondo, Global Co-CIO of Multi-Asset Solutions at Goldman Sachs Asset Management. Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, expects the Fed to cut rates in September, with two more rate cuts expected by the end of the year.
Larry Tentarelli, Chief Technical Strategist for Blue Chip Daily Trend Report, remains bullish on the S&P 500 index into year-end but expects no September rate cut unless the jobs market drops off drastically.
U.S. businesses have absorbed the tariff costs so far, according to Skyler Weinand, Chief Investment Officer at Regan Capital. However, it's only a matter of time before tariff costs make their way through to consumers. This is a concern that has been highlighted by many experts.
CME FedWatch shows futures traders are pricing in a 90% chance the Fed will issue its next quarter-point rate cut at its September meeting. This anticipation is based on the temporary nature of tariff-driven inflation and the broader economic deceleration that supports expectations for interest rate cuts in the near future.
Investors at Janus Henderson Investors, such as Daniel Siluk, are maintaining a positive outlook on the overall liquidity situation, with the July CPI report suggesting that inflation remains under control. Despite the moderate increase in both Headline and Core CPI, and the potential inflationary impact of tariff policies in 2025, many experts believe this pressure to be transient.
During this period of managed inflation, finance professionals will be closely monitoring the Federal Reserve's decisions regarding interest rates, with predictions of potential rate cuts this year based on economic deceleration and the anticipated transmission of tariff costs to consumers.
