U.S. consumers likely got some relief from sizzling price increases in July but Fed won’t feel any better

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As a result, headline inflation over the past year will drop slightly to an 8.7% rate compared with the 41-year high of 9.1% in June.

But in the big scheme of things, an annual inflation rate above 8% will be “cold comfort to the FOMC,” said Richard Moody, chief economist at Regions Financial Corp., in a note to clients.

Opinion: CPI and other data this week pivotal for Fed policy

The central bank will also focus more on the details of the report, and are likely to be disappointed, said Omair Sharif, the founder and president of Inflation Insights.

Following the Fed policy meeting last month, markets seem to expect the Fed will pivot and will soon start to cut interest rates as economic growth slows. The yield on the 10-year Treasury note
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2.838%
has dropped to 2.78% from 3.03% in mid-July.

Fed officials have been pushing back on that notion,  said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, in a note to clients.

“Fed officials from across the hawk-dove spectrum indicated the dovish market repricing following the July FOMC meeting was unwarranted and that a lot of work was left to ensure that inflation is on a downward trajectory back towards the Fed’s target,” Luzzetti said.

Fed officials won’t be satisfied if prices of one or two categories are slowing, Sharif said. 

“I think what the Fed wants to see is not just a step down in the monthly print but they want to see evidence that this reduction in speed is broad-based,” he said.

The report isn’t likely to meet that standard.

Indeed, core CPI, which excludes volatile food and energy prices is expected to only cool a bit, to a 0.5% gain in July compared with a 0.7% gain in the prior month.

Read: Here’s an explanation of the different measures of inflation

And on an annual basis, this would push core CPI up to a 6.1% rate from 5.9% in June.

“They certainly won’t welcome an acceleration in the core or even persistent strength in the core,” said Diane Swonk, chief economist at KPMG. 

Sharif thinks core might be softer than consensus in July but still doesn’t think the Fed will celebrate.

A lot of the slowdown will be caused by lower prices for used cars and airline fares, he predicted.

“I think the Fed will want to see more broad based deceleration in the core before they are really comfortable saying this is the kind of a sustained slowdown that we need to see to get us to step back from the magnitude of the rate hikes,” Sharif said.

Over the past two months, the Fed has raised its benchmark rate by 1.5 percentage points to a range of 2.25% – 2.5%. Markets are pricing in another 75 basis point move in September.