Consumer inflation has surged back after a strong quarter of U.S. consumer demand.
As shown in the LPL Chart of the Day, Consumer Inflation Picks Up in July, the core Consumer Price Index (CPI), which excludes food and energy prices, rose 2.2% year over year last month, its fastest pace of growth in six months. Core CPI has climbed 0.3% month over month in June and July, its biggest two-month gain since 2005.
Today’s data could be a relief for investors, as slowing growth in consumer inflation earlier this year sparked concerns of weakening global demand. Core CPI growth dipped as low as 2% year over year in March and May amid a strengthening U.S. dollar, which curbed import price growth even as tariffs raised costs.
“Consumer inflation has shown signs of life recently after a tepid start to the year,” said LPL Research Chief Investment Strategist John Lynch. “We believe the fundamentals of the economy, including full employment, rising wages, and low interest rates, can help sustain stock prices in the months ahead.”
Rising consumer inflation could also present a tricky dynamic for the Federal Reserve (Fed), especially as markets are pricing in multiple Fed rate cuts through the end of the year. July’s year-over-year growth in core CPI corresponds with core personal consumption expenditures growth just below the Fed’s target of 2%, based on the two gauges’ historical relationship. Ensuring stable price growth is one half of the Fed’s dual mandate. The next round of tariffs—if they go into effect—may add near-term upward pressure on prices for consumer goods, potentially providing a floor for market interest rates.
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Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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