Today’s report on July consumer prices gives the Federal Reserve a bit more elbow room for lowering rates. This alone doesn’t insure a rate cut’s imminent, but at least one can reason that the CPI news alone doesn’t preclude the central bank from unleashing a fresh round of monetary easing.
The Labor Department reported that seasonally adjusted headline CPI rose by a mere 0.1% last month. For the year to July, CPI climbed by just 2.4%, the slowest annual pace since February.
Core CPI also looks contained. On an annual basis, CPI ex-food and energy advanced 2.2% for the year through July, unchanged from the annual rate posted in June.
On its face, the CPI news comes just in time to counter yesterday’s whiff of trouble embedded in the report on producer prices. As we wrote yesterday, there was reason to worry that core PPI was starting to look robust once more. But with no corroborating evidence in today’s CPI, one can breathe a sigh of relief. Taken together, PPI and CPI offer a mostly encouraging review about general price trends.
But for those who look beyond inflation measures proper, there are still gads of liquidity in the global economy. This despite the recent liquidity crunch roiling the mortgage market at the moment. The question for strategic-minded investors is whether to take the CPI report as gospel and dismiss the still-robust growth in liquidity in countries near and far. Alternatively, is there reason to fear that global liquidity presents a threat for the Fed and its mandate to keep inflation contained? If so, does that mean that Bernanke and company have less room to ease rates than the CPI report alone suggests?