Services excluding shelter—the so-called supercore measure—was running at 4.1% year-over-year in June, while core goods remained in outright deflation at -1.2%. This split underscores the challenge for policymakers: goods prices are providing relief, but the dominant services side of the economy is still generating above-target inflation.
The July CPI print lands in a markedly different policy environment than the one that greeted the June data. At its July 28–29 meeting, the Federal Open Market Committee held the federal funds rate at 3.50–3.75% for the fifth consecutive meeting, but the vote was 9–3, with three regional bank presidents dissenting in favor of a quarter-point hike. Chair Kevin Warsh used his press conference to emphasize that the 2% inflation target is not soft and that the Committee is deliberately avoiding forward guidance to let markets transmit tighter financial conditions.
Since that meeting, the labor market has sent an unambiguous signal. July nonfarm payrolls contracted by 23,000 jobs—the first outright decline of the cycle—and prior months were revised down by a combined 103,000. The unemployment rate held at 4.1%, but the participation rate slipped to 61.4%, indicating that the headline jobless rate understates the cooling. For the first time in this tightening cycle, both sides of the Fed’s dual mandate are pointing in the same direction: inflation is gradually easing while employment is weakening.