Fed is still ‘inflation-first’ after cooler CPI, but weak jobs report means it’s no longer ‘inflation-only’ – Natixis

(Kitco News) – Wednesday morning’s CPI report is proof that broad inflationary pressures are easing, but while the Federal Reserve is likely to remain focused on inflation between now and the September meeting, last Friday’s dismal nonfarm payrolls data means both sides of the dual mandate are back in play, according to economists at Natixis.

Economists Christopher Hodge and Selin Aker wrote that last week’s employment report casts the in-line CPI data in a different light.

“After the dismal jobs report from last Friday, we thought the definition of what would be considered an encouraging CPI print had expanded, and today’s data likely falls into the encouraging category,” they said. “Shelter costs were again subdued and helped to offset the unusual rise in education and communication commodities and recreational commodities. Core goods interrupted two prior negative readings and rose 20bps on the month, but we don’t think that this trend is likely to continue.”

“The supercore index, which is the best gauge of the underlying inflationary pressures that Warsh speaks often about, bounced back from an absurdly low June reading, but remained well contained at only 19bps on the month.”

Pulling back, Natixis sees the overall disinflationary trend is continuing. “The three-month annualized rate has been lower for four straight months and, as we have argued ad nauseam, broad-based inflationary pressures continue to wane,” they noted, adding that progress toward the Fed’s 2% target has been slow and inconsistent, but moving in the right direction.

“This is still an inflation-first Fed, but given last Friday’s jobs numbers, it can no longer be an inflation-only Fed,” Hodge and Aker said. “All Fed meetings in the near future will need to price in the possibility of a surprise, but we continue to think that the Fed will be able to narrowly avoid a hike amid a slow and gradual drift down towards target inflation, a cooling consumer sector, and a more precarious jobs outlook.”

“We will of course need to wait for tomorrow’s PPI to get a read on July PCE (not to mention August CPI and jobs numbers), but today’s data affirms our call for an extended hold.”

Gold prices shot to multi-month highs in the wake of the CPI release, with spot gold reaching a session high of $4,441.31 around 9 am ET. 

Spot gold last traded at $4,421.11 for a gain of 1.21% on the daily chart.