Market Commentary: Inflation Finally Falls Flat, Stocks Respond Positively

Inflation slowed significantly in July. Lower energy prices, including a 7.7% decline in gasoline prices, helped the Consumer Price Index stay flat. Food and shelter costs helped offset the decline in energy prices. The core inflation rate fell to 0.3%, suggesting inflationary pressures are present but moderating from previous months. Estimates for both data points were 0.2% higher than the actual data. The annual inflation rate remains elevated at 8.5%. Producer prices reflected a similar trend as the Producer Price Index fell 0.5% last month.

Key Points for the Week

  • The Consumer Price Index (CPI) was flat last month, and core inflation increased 0.3%. Both numbers were 0.2% lower than expected.
  • Expectations for future interest rate hikes fell in response to the CPI report after the previous week’s strong jobs report prompted them to rise.
  • Market breadth is improving; 80% of the S&P 500 is above its 50-day moving average.

Expectations for future rate hikes fell after the inflation data. The expected rate increase at the September Fed meeting dipped from 0.75% to 0.50%. Market expectations have been volatile. The strong jobs report earlier this month raised expectations for faster rate hikes, while the weak inflation report reversed them.

Stocks responded positively to the news. Markets added to recent gains. The S&P 500 soared 3.3% last week. The S&P 500 is now down 9.9% from its record high. The MSCI ACWI of global stocks climbed 2.9%. The Bloomberg Aggregate Bond Index added 0.2%. This week will be relatively quiet for key economic releases. Retail sales will be released in the U.S. and China. The reports will provide additional information on how consumers are acting in the world’s two largest economies.

Figure 1

A Respite from Rising Prices

“The Consumer Price Index for all Urban Consumers was unchanged in July on a seasonally adjusted basis after rising 1.3 percent in June.”

That was the surprising first sentence of the Bureau of Labor Statistics’ (BLS) Consumer Price Index report for July. In other words, the rate of price changes, i.e., inflation, was flat last month. July’s report showed the lowest monthly increase since May 2020 and fell short of expectations for a 0.2% increase.

It was a welcome respite from the rapid increase in inflation that has gone on for more than a year. As the BLS noted in the report, prices have increased 8.5% over the last 12 months. The big driver for inflation running at a pace of 8.5% over the past year has been rising energy prices. But those fell 4.6% in July and were mostly responsible for headline inflation coming in flat. Gasoline prices, which are closely watched by the public, fell 7.7%. Food prices continued to increase, rising 1% in July and offsetting some of the decline in energy prices.

The real surprise was below the headline number. Core prices (for items excluding food and energy) were expected to rise 0.5% in July, but they came in at 0.3%. This is the smallest monthly gain in core prices in 10 months. The details were very positive, with core inflation easing across a broad range of categories. Prices for used vehicles fell in July, as did prices for several other pandemic-impacted services, such as airline fares, hotels, and car and truck rentals, thus imposing a deflationary force for the first time in almost a year. Price changes in other categories, such as medical care, internet services and child care, also slowed or reversed.

One major concern was prices for shelter (rentals and owner-occupied) continued to rise at a pace well above pre-pandemic levels. It eased a bit in July but nowhere near enough to pull inflation back toward the Fed’s 2% target anytime soon.

Even if core inflation runs at a monthly pace of 0.3% over the next 12 months, yearly inflation would add up to 3.8%. That would be higher than at any point in the last 15 years, prior to this year. Combine this with the strong wage growth from last week’s payroll report, and it seems likely the Fed will continue its urgent pace of rate hikes, including a 0.75% increase in the federal funds rate at its September meeting.

Markets clearly do not agree with this assessment and are currently pricing in a 0.50% increase next month. This is a reversal from expectations for a 0.75% increase that was priced in immediately after a surprisingly strong employment report. But we’re likely to bounce back and forth over the next few weeks.

The Fed is no longer giving any guidance for its upcoming moves; instead saying it will be “data dependent.” This report supports that stance as the rapid rate hikes and gradual balance sheet reduction seem to be having some effect on inflation. A lot of data will be released between now and the Fed’s September meeting, including PCE price index data for July (Fed’s preferred inflation indicator) as well as employment and CPI inflation data for August. All these reports could result in higher volatility as investors scour them for clues on the committee’s next steps and whether July’s data was a brief respite or a new trend.

This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.


The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.


The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.


The Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bureau of Labor Statistics. 08/10/22

Bureau of Labor Statistics. 08/11/22.

CME Group. 08/14/22. Jeff Cox. 08/11/22.

Compliance Case # 01459131

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