Inflation Eased Last Month More Than Expected

Key takeaways

• Investors spent Monday and Tuesday gearing up for the inflation report this week, released early Wednesday
• Analysts and economist inflation expectations showed July’s CPI easing as price gains begin to slow
• Falling gas prices propped up hopeful forecasts, though disappointing company earnings led the market to close mostly flat
• July and August’s inflation and jobs data are expected to inform the Fed’s upcoming rate hike decision in September

Futures rose while stocks slipped Tuesday amid disappointing company earnings and the buildup to the highly-anticipated inflation report this week.

As futures nicked up marginally, the Nasdaq Composite led Tuesday’s declines, falling almost 1.2%. The S&P 500 and Dow trailed behind, shedding about 0.4% and 0.2%, respectively.

Shares fell in part thanks to a batch of disappointing company earnings that pointed to tough roads ahead. Chipmakers Nvidia and Micron, alongside vaccine maker Novavax, warned the future revenue could fall short of prior guidance amid a slowing economy.

But the early week’s stock declines are just the start. Investors spent Monday and Tuesday gearing up for Wednesday’s Consumer Price Index release. The data within – and the Fed’s response – will guide interest rate policies and consumer sentiments in the months ahead.

What investors expected in the inflation report this week

The July Consumer Price Index was released Wednesday morning. Prior to its release, investors spent all Tuesday seeking proof that inflation had peaked. Stakes were especially high this month after Friday saw unexpectedly high U.S. jobs data roll in.

Predictions pegged headline Consumer Price Index prices rising by 8.7% annually, or 0.2% on a monthly basis. Another inflation metric, which strips out volatile food and energy prices, saw inflation rising 6.1%, slightly above June’s 5.9%.

Economists expected the inflation report this week to show a slight slowdown in price gains as oil and gas hikes cooled. Gas prices dropped throughout July, currently sitting around 20% below June’s peak. As of Tuesday, the average price for a gallon of gas nationwide sat at $4.03.

Meanwhile, some supply chain pressures have gradually eased this summer. Recent data suggests that supply delivery times have shortened as paid prices have dropped.

At the same time, economists predicted that housing costs would rise in July, with June seeing the largest monthly rent index increase since 1986. Some economists believe that rents will moderate after a brief peak, between dueling unaffordable prices and rising multifamily construction data.

What investors actually got in the inflation report this week

The data released on Wednesday suggested that U.S. inflation has relaxed more than expected last month. That’s largely thanks to dropping gasoline prices and easing supply chain issues.

All in all, the Consumer Price Index ticked up 8.5 percent in July. This was a larger slowdown than anticipated.

Inflation expectations going forward

July’s inflation numbers could set the stage for upcoming Fed actions. But the numbers aren’t everything – consumer sentiment matters, too. And on that front, the New York Fed has some encouraging news.

According to the most recent New York Federal Reserve consumer sentiment survey, future inflation expectations dropped substantially in July. The forward-looking one-year inflation expectation dropped from 6.8% in June to 6.2% in July, with the three-year expectation slipping from 3.6% to 3.2%. Median five-year inflation expectations also moderated slightly, sliding from 2.8% to 2.3%.

These decreases occurred broadly across income groups, spearheaded by expected declines in food and gas prices. Home price and year-ahead spending growth expectations also pulled back from recent highs.

The survey results provide proof that consumer sentiments could be improving, as well as encouragement that economic situations could be coming under control. This spells good news for future rate hike prospects, as lowered inflation expectations reduce the likelihood that inflation fears will produce a self-fulfilling prophecy of higher inflation.

What does this mean for investors?

Already, Federal Reserve officials have noted that the possibility and severity of future rate hikes will depend on inflation, employment, consumer and economic growth data between now and their policy meeting in mid-September.

If August’s inflation numbers run high, that – along with Friday’s phenomenal employment data – could hint toward a 75-basis point rate hike next month.

For most investors, that means the best course of action is to wait to see how the Fed acts. While high interest rates stand to dampen investment profits as corporate growth slows, this week’s earnings report suggest that inflation itself also weighs heavier than expected on corporate America.

Even so, between high inflation, high interest rates and this year’s stock market performance, it’s no wonder many investors remain wary of diving back into equities.

How does this impact factors that hit our AI?

Inflation expectations are a key dynamic that Fed policymakers watch when determining when and how much to hike interest rates. Already, the Fed has raised its policy rate by 225 basis points (2.25%) since March.

With last week’s employment data coming in strong, another 75 basis points could be in play come September. And though consumer sentiment remains strong, that may change if inflation doesn’t begin to fall within expectations soon.

All told, the news is mixed for consumer and investor sentiment. While rate hikes greatly impact business borrowing and growth, higher interest rates can also bring down the inflation eating into consumer wallets and investor profits.

Additionally, with consumer and investor sentiment – not to mention economic performance – tentatively on the rise, that could spell good news long-term. In turn, that may positively impact the sentiments accounted for by our AI.

Don’t let the inflation report this week impact your long-term goals

At the end of the day, investing isn’t a sprint – it’s a marathon. While this week’s inflation report and next month’s interest rate moves may impact the stock market, ultimately, the move will soon be reduced to a blip on a stock chart.

So, how do you know when to invest, and on what economic data?

The answer: you don’t.

It’s impossible to predict what data will impact stock performance long-term, and when supposedly “big” news is little more than a drop in the bucket. And when you’re investing on a long-term time horizon, the difference is often negligible.

Fortunately, with Q.ai, you can feel comfortable taking the position that short-term inflation data ultimately doesn’t matter. Our artificial intelligence reads the market and employs data-backed strategies to trade quickly and intelligently.

Whether you want to protect your cash with our Inflation Kit or engage Portfolio Protection to minimize the impact of short-term news, we’ve got your back. So, what are you waiting for?

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.