The July CPI report – Is Inflation Cooling Off?
Dan Nastou, CFA
Inflation has been running hot lately. So the Consumer Price Index, or CPI, has been getting a lot more attention than usual. Let’s dig into what it’s about.
The CPI and inflation
For those who don’t know, the CPI is an index that tracks the prices of various goods and services over time. Basically it represents a basket of stuff that we consume – things like apparel, shelter, food, energy, to name a few.
So it’s the change in the CPI level over time that we use for approximating inflation. The faster the CPI is rising, the higher inflation.
What we’re seeing now
Last week, the Bureau of Labor Statistics released the July CPI numbers. And from June 2022 to July 2022, the CPI showed no increase at all (on average), which means prices (on average) did not increase for the month. In other words inflation was 0%, for the MONTH of July. This was generally viewed as promising news and the stock market rallied as a result.
However, it’s not all good news. The CPI in July 2022 was still 8.5% higher than it was in July 2021, which means year-over-year inflation was still 8.5%. Stuff, on average, was 8.5% more expensive in July 2022 than July 2021. Normally we expect annual inflation to be about 2 to 3%.
So, as you can imagine, there’s been some confusion in the media as to whether inflation was 0% or 8.5% for July. But it really just depends on your time frame. For the one month from June to July it was 0% (prices didn’t increase on average – a sign that inflation might be slowing). Over the last twelve months though, prices rose 8.5%.
It’s also important to note these numbers are just averages. In July, some goods and services increased in price, while others (notably energy) decreased. The combination happened to net out roughly to zero for the month, but it was a mixed bag.
So what’s the takeaway?
While the July slow down is potentially an encouraging sign that inflation could be peaking, it’s only a sample size of one month. And we have a long way to go before we can definitively claim victory over high inflation.
Inflation will undoubtedly remain in focus over the next few months as we wait to see if the slowdown becomes a lasting trend.
The next CPI release is scheduled for September 13th. So stay tuned.
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