July inflation report could lead to another rate hike, asset manager says

While inflation data for July was not a surprise and slightly better than expected, it was nonetheless higher than the June figure and the first uptick in 13 months, potentially leading to another rate hike by the Federal Reserve, an asset manager said.

"Prices are being driven higher by shelter, energy and food, which are the more 'sticky' types of prices and they are now picking back up in this moment," said Brian Mulberry, Denver-based client portfolio manager at Zacks Investment Management, by email. "This means that we have broken the streak of 12 straight months of price declines, and that would suggest to me that we have taken out the easy inflation in this cycle, and from here, forward prices are likely to be more stubborn. That likely leads to another round of tightening from the FOMC."

The Bureau of Labor Statistics reported on Thursday that the consumer price index rose 3.2% from a year ago in July, slightly below expectations, but above the 3% annualized rise recorded in June.

Economists were expecting a 3.3% annualized CPI figure for July, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 4.7% in July 2023.

The Federal Reserve has considered the inflation rate a key factor in its monetary policy.

The Fed's key short-term interest rate is now in a range of between 5.25% to 5.5% — after the central bank hiked rates by 25 basis points at its July 26 meeting.

As of Thursday morning, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 88.5% probability that the Fed will keep rates unchanged when it issues its next monetary policy decision on Sept. 20 and only a 11.5% probability it will keep rates unchanged.

A big issue for equity markets, added Mr. Mulberry, would be if prices remain elevated then rates will also remain stubbornly high — above 5%. "That would be a significant departure from where rates are priced in for 2024," he stated.

Zacks has $15.1 billion in assets under management.

However, Gurpreet Gill, London-based global fixed income macro strategist at Goldman Sachs Asset Management, said some of the underlying details of the July CPI inflation data were consistent with ongoing progress on disinflation.

"Although core services inflation trended higher on the month, other component-level trends are evolving in line with our expectations," she said by email. "In particular, rents and used car prices softened, alongside clothing and airfares."

The Fed, Ms. Gill added, has emphasized that its September meeting decision will hinge on the totality of data accumulated between now and then.

"The latest CPI data reinforces our view that July likely marked the peak in the Fed's hiking cycle, however, we will be closely monitoring the evolution of core PCE (Personal Consumption Expenditures) inflation and labor market rebalancing to determine whether the disinflation trend is durable," she added.

GSAM had $2.71 trillion in assets under supervision as of June 30.