The latest round of inflation data was VERY troubling.
The headline numbers for the Consumer Price Index (CPI) for the month of July pointed to a slowdown in inflation: month over month (MoM), CPI came in at 0.2% while year ov er year (YoY) at 2.7% on expectations of 0.2% and 2.8%, respectively.
However, “under the hood” the data was HIGHLY problematic.
For starters, Core-CPI (CPI excluding energy and food prices) came in hotter than expected at 3.1% YoY on expectations of 3.0%. Granted, this is a very small upside surprise, but the devil’s in the details and the details point towards inflation stabilizing at 3%, NOT heading towards the Fed’s target of 2%.
Case in point as Mike Konczal points out, the percentage of Core-CPI components that are clocking in at an annualized rate of 3% is RISING, not falling. The month of July saw 52% of the 83 items comprising Core-CPI growing at an annualized rate of over 3%!
Core-CPI is not the only problem area in the data. Over two thirds (68%) of total CPI components (including food and energy prices) are now rising at a faster than 2% annualized rate. The initial disinflationary wave that occurring during the first half of 2025 has reversed and prices are now rising for MOST CPI components. This means inflationary pressure is BROADENING, which is a BIG problem.
Finally, we have to consider what food inflation is saying. As I’ve noted before, back in 2001, the Fed had several researchers dive into the subject of inflation. Their goal was the analyze whether the Fed’s preferred measures of inflation (CPI and PCE) are decent predictors of future inflation. The Fed also investigated a whole slew of other inflation measures for comparison purposes.
The results?
The Fed found that food inflation, NOT CPI or PCE, was the best predictor of future inflation. Fed researchers wrote the following:
We see that past inflation in food prices has been a better forecaster of future inflation than has the popular core measure [CPI and PCE]…Comparing the past year’s inflation in food prices to the prices of other components that comprise the PCEPI (as in Table 1), we find that the food component still ranks the best among them all…
Source: St Louis Fed (emphasis added).
I bring this up because the Producer Price Index (PPI) data for the month of July was released this morning. It showed a HUGE jump in food prices MoM. Fresh and dry vegetables prices jumped 38% while meat prices jumped 5%!
Put simply, while headline inflation data suggests that inflation has been tamed, the actual components in the data suggest that an inflationary resurgence may be starting and that it will involve price increases in a BROAD array of items. Throw in the fact that the single best predictor of future inflation (food inflation) just jumped higher on a month over month basis and there is REAL cause for concern that another wave of inflation might be starting.
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Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
