Leaving aside most of the gory detail, these two charts tell you what you need to know after yesterday's US CPI report for July. Core inflation ex-shelter is now running at 1.6% per annum over the past 6 months. And though shelter costs remain stubbornly high (averaging 0.4% per month for the last 1/2 year), they are coming down hard on a 6m basis and converging with what rents are actually doing on the ground.
Job more or less done on inflation. Now it's time to pay attention to the jobs leg of the Fed's mandate. The Fed Funds Futures market is pricing in four 25bp cuts from the Fed this year, which would arguably take policy rates back close to neutral. But moving that quickly is probably one cut more than the FOMC would feel comfortable with for now. It depends in part on whether the August Employment data reverses the week impression from last month's report (quite likely in our view). But even before that the BLS will release provisional benchmark revisions on the 21st August. And it's quite possible that those revisions will suggest that payroll data has been somewhat overstated in the first seven months of the year. In which case, the case for four rate cuts this year will remain intact even if August payrolls rebound.
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