Moderating CPI Tempers Inflation Fears

Yields fall as CPI index shows moderating consumer inflation

Swap rates and yields fell across the curve as CPI data came in-line with expectations for the month of July. MoM headline CPI in July was 0.5%, down from the 0.9% increase in June while annualized CPI came in at 5.4%. The softer CPI data was somewhat offset by hawkish comments from Kansas City Fed President George, who commented today that “the time has come to dial back the settings” on current Fed policy. The 10y UST yield ended the day down 1 bp while the curve steepened marginally – the the 2y10y spread increasing 2 bps 10 1.12%.

Core CPI decelerates, remains far above Fed’s target

CPI data showed continued increases in consumer prices, albeit at a slower pace in July. Core CPI, which excludes food and energy, rose 0.3% in July compared to 0.9% in June, while the YoY increase was 4.3% compared to 4.5% in June. The 4.3% increase is still well above the Fed’s inflation target of 2.0%.  Analysts expect pricing pressures to continue in the coming months, as material shortages, supply chain difficulties, and wage inflation bleed through to end prices.

Two-for-one special with PPI and initial jobless claims tomorrow

The market will get another look at the labor market’s health and pricing pressures tomorrow with both the July producer price index and initial jobless claims data being released at 8:30am EST. Recent Fed speakers have reiterated that if the labor market continues to improve, a taper announcement could happen as soon as September.