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

• The three-month annualized inflation rate has declined for four consecutive months, with shelter costs remaining subdued and the 'supercore' index staying well contained at only 19 basis points monthly
• Despite easing inflation, Natixis expects the Fed to maintain an extended hold on rate changes, waiting for upcoming PPI, PCPI, and August employment data before making any policy shifts
• Gold prices surged to multi-month highs following the CPI release, with spot gold reaching $4,441.31 and trading at $4,421.11, up 1.21% on the day

Summary

Following Wednesday's cooler CPI report and last Friday's weak jobs data, Natixis economists assert the Federal Reserve remains "inflation-first" but can no longer be "inflation-only" in its policy approach, bringing both sides of its dual mandate back into focus.

Key Data Points:

• July's CPI came in at in-line expectations, considered "encouraging" given the employment context
• Core goods rose 20 basis points month-over-month, interrupting two consecutive negative readings
• The supercore index (key inflation gauge) increased just 19 basis points monthly, remaining "well contained"
• The three-month annualized inflation rate has declined for four consecutive months
• Gold prices surged to multi-month highs at $4,441.31 per ounce around 9 AM ET, settling at $4,421.11, up 1.21%

Analysis:

Natixis economists Christopher Hodge and Selin Aker noted that shelter costs remained subdued, offsetting unusual increases in education, communication, and recreational commodities. While progress toward the Fed's 2% inflation target has been "slow and inconsistent," the overall disinflationary trend continues.

Market Implications:

The analysts maintain their call for an "extended hold" on rates, predicting the Fed will "narrowly avoid a hike" due to gradually declining inflation, cooling consumer spending, and a deteriorating jobs outlook. However, they caution that all upcoming Fed meetings "will need to price in the possibility of a surprise."

The firm awaits Thursday's PPI data for a clearer read on July PCE, along with August CPI and employment figures, before refining its outlook.