After yesterday’s surprisingly encouraging news on producer prices, investors were looking for a clear and unambiguous repeat performance with this morning’s report on consumer prices for July. But the financial gods delivered something else. Something else, but it will suffice, or so early signs from the bond market reveal.
Today’s CPI release is a poster child for mixed messages. Top-line CPI advanced by a seasonally adjusted 0.4% last month, the Labor Department reported. That’s twice as high as June’s 0.2% pace, and near the highest levels on a 12-month rolling basis for recent history. As a result, consumer prices jumped by 4.2% for the year through last month–a rate that lends no comfort for thinking that inflation is a receding force.
But investors are focused elsewhere, namely, the core rate of inflation (which ignores food and energy prices), and this gauge offers a more promising trend. Core CPI rose by 0.2% in July, down from the 0.3% in the previous month. But any optimism that springs from this good news is tempered by the fact that core inflation on a 12-month basis remains at the June level of 2.7%, which is the fastest 12-month change since 2001, as the chart below shows.
12-month rolling % change in core CPI, through July 2006

It all boils down to a consumer price report for July that’s less encouraging than yesterday’s producer price report. The bond market was no doubt expecting something more clarifying, or so yesterday’s buying spree in the trading pits of the 10-year Treasury suggest. Indeed, the bulls aggressively snapped up the benchmark 10-year on Tuesday,
pushing the yield down to 4.93% by the session’s end–or seven points lower than the previous close on Monday. As votes of confidence go, Tuesday’s trading spoke loud and clear on expecting the PPI’s-inspired cheer to continue today.
Cheering, however, is a fragile state of mind these days when dissecting the future path of inflation. Or is it? As we write this morning, the 10-year’s yield has continued to inch lower, dipping to 4.87% more than one hour after the CPI data hit the streets.
The message on inflation may be still be a bit murky, but Mr. Market’s prediction couldn’t be clearer: the Fed’s pause will continue. The interest-rate-setting FOMC convenes next on September 20. But while a lot can happen between now and then, bond traders are growing more convinced that the future of monetary policy is no longer a mystery.