The figures are not as good as they look on the surface.
July brought a measure of relief on the inflation front. Because of a 4.6% drop in energy prices, the overall consumer price index (CPI) for the month showed no inflation. The stock market took the news to heart, so much so that the benchmark S&P 500 Index rose 1.7% on the opening bell. Investors seem to think that the good news will convince the Federal Reserve (Fed) to abandon its anti-inflationary efforts, stop raising interest rates and provide liquidity more liberally to financial markets. Should the Fed respond this way, it would make a big mistake. One month does not reverse any trend, especially one that has gained considerable momentum for over a year. Details from this latest CPI report make this fact clear.
Food is the first consideration. It is the largest single part of America’s household budget, and it rose 1.1% in July alone, an annual inflation rate of 14% and a distinct acceleration from the 10.9% averaged during the last 12 months. This picture alone, regardless of any other consideration, pressures households and the Fed, and also has political ramifications.
Nor is it likely that energy prices will in coming months continue to provide the relief they did in July.
