Key facts
- July's CPI and PPI reports indicated that underlying inflation pressures remain firm.
- Headline inflation figures were benign, driven by falling energy and food prices.
- Core services inflation showed renewed acceleration, suggesting sticky price pressures.
- Traders reduced expectations for a September Fed rate hike following the data.
- Hawkish Fed members may still advocate for further rate increases due to persistent underlying inflation.
- The Euro saw gains against the dollar as Fed hike expectations narrowed against the ECB's.
July's inflation data provided a mixed picture, offering some relief to the Federal Reserve's rate-setting committee while not entirely resolving the debate on future monetary policy. The Consumer Price Index (CPI) report suggested that underlying price pressures remain firm, which could support a hawkish stance among some Fed officials, even without considering geopolitical factors.
While the headline Producer Price Index (PPI) for July was benign, showing final demand unchanged after a decline in June, the underlying composition indicated firmer price pressures. Energy-driven goods deflation masked a renewed acceleration in core services and a late-stage pipeline pickup. This suggests that the report was more inflationary beneath the surface than the 0.0% print indicated, a narrative similar to the CPI data which also showed sticky underlying inflationary pressures.
The US Dollar Index slipped to 99.84 following the PPI data, largely due to a significant fall in final-demand energy prices and food prices. Gasoline prices alone dropped 5.7%, accounting for over half of the monthly decline in final-demand goods. However, goods excluding food and energy still rose, and motor vehicles and equipment increased. Despite traders pushing back expectations of a September rate hike, the persistent underlying inflationary pressures are likely to reinforce the views of hawkish Fed members who believe policy should move upwards. This leaves a September rate hike firmly on the table.
The Euro gained 0.1% to $1.1533 as US inflation data led traders to reduce near-term Fed rate hike expectations, narrowing the policy spread between the Fed and the European Central Bank (ECB) in favor of the Euro. Eurozone industrial production was unchanged in June, beating forecasts. Money markets continue to price in a high probability of further policy action from the ECB next month, with traders pricing around 37 basis points of further tightening this year.
Sterling remained little changed at $1.3498, following UK GDP and industrial production data. UK growth outperformed expectations in June and the second quarter, driven by services. However, details suggest a softer second half of the year due to energy costs, fiscal uncertainty, and disruptions from renewed conflict.