The July Consumer Price Index has been published and while the data came in a below consensus expectations, the magnitude of the month over month decline was rather small suggesting inflation pressures remain at elevated levels despite the rollover in the pump gas prices. By the numbers:

  • Headline CPI for July came in at 8.5% vs. the expected July headline figure of 8.7% and 9.1% the prior month
  • Core CPI for July was far less changed coming in at 5.9% vs. the expected core CPI reading of 6.1% and 5.9% the prior month

Food Inflation

Looking through the data contained in the July CPI report, food inflation continued to rise with both Food at Home and Food Away From Home posting hotter numbers compared to June. While gas and fuel oil prices eased in July vs. June, electricity prices continued to trend higher compared to last year as did transportation services, medical care services and medical care commodities.

Given announced pricing action by a variety of food and restaurant companies, including our own McCormick & Co. (MKC) and Chipotle (CMG) , as well as Coca-Cola (KO) and others, odds are food related inflation isn't likely to come down as quickly as gas and fuel oil has. Given PepsiCo's (PEP) comments as to the how price inelastic its product have been, lower than historic norms, we could see it follow Coke's lead with yet another round of price increases.

The same is likely true for medical care, and that means we're likely to see small bite sized declines in the inflation data. As we parse the monthly PMI data from ISM and S&P Global, we'll continue to lean into what's said on both input and output price action.

Retail Margin Pressures

The July CPI report also showed a month over month decline in pricing for Apparel, which we see as a confirmation point that retailers are indeed using aggressive pricing to work down those bloated inventories, as we discussed a few months ago. With most apparel and related retailers having July quarter ends, the coming days should give us some insight as to how aggressive they are being in working those inventories down and what that could mean for the August CPI report.

More aggressive pricing translates into larger margin pressures, which means we're likely to be on the mainstream retailer sidelines until at least the worst of the inventory clearing process is over.

The data in the July CPI report is rather confirming for not only what consumers are feeling, the pain of higher food prices, but also the data published earlier today from other geographies that we discussed in our opening comments for today.

We continue to see shoppers taking advantage of Costco Wholesale's (COST) growing array of grocery and fresh foods, with the shift to eating at home favoring our position in MKC shares as well as PEP shares.

The Fed

In terms of the Federal Reserve and its next course of expected monetary policy action, the July CPI report showed some  progress but not all that much. Taken together with the hotter than expected wage inflation in the July Employment Report, it likely means the Fed will continue to fight inflation.

As we can see by the quick shift in the CME FedWatch Tool, however, that now favors a 50-basis point rate hike exiting its September meeting vs. a 75-basis point one just yesterday. Tomorrow's July Producer Price Index will hopefully bring another layer of clarity with its data. Yet for the end of 2022, fed futures is still predicting a 3.5% funds rate, so a total of 1.25% more in rate hikes from current levels.