Last Wednesday, the Bureau of Labor Statistics (BLS) published the July inflation data.

The consumer price index (CPI) rose 8.5% over the past year. This marks a slowdown from 9.1% in June.

Naturally, many are hopeful that prices have finally peaked.

President Biden certainly seems to think so… At a White House press briefing shortly after the BLS published its figures, he announced that inflation was actually… well, 0%.

Today, we received news that our economy had 0% inflation in the month of July… While the price of some things went up last month, the price of other things went down by the same amount. The result, zero inflation last month.

This comes on top of the White House seemingly changing its definition of “recession,” which Nomi wrote to you about recently.

So if you’re confused about what’s going on in the economy, you’re not alone.

So, in today’s essay, I’ll explain what’s happening, and what it means for you and your money.

The Nitty-Gritty

Let’s start by addressing the proverbial elephant in the room – President Biden’s comments on inflation.

It’s likely that the president was referring to the month-over-month change. And it’s true, from June 2022 to July 2022, there was no change to prices overall – 0%.

But just to be clear… The number that truly matters is the year-over-year change. From July 2021 to July 2022, prices rose a hefty 8.5%. And that’s the number that markets go by.

So by choosing to celebrate the flat monthly CPI figure, for many people, it felt like President Biden was cherry-picking, at best.

Because if you look more closely at the July BLS report, some key categories that make up the CPI are still moving upwards.

For instance, food prices were up 1.1% month over month. That’s the second-biggest increase this year. I’m sure you continue to notice that increase in your shopping bills.

Electricity was up 1.6% from June. And shelter costs (which make up about one-third of the CPI) were up 0.5% in June.

Now, you may be wondering how, with all these items up, the BLS was able to show a lower annual CPI number for July…

There’s one main reason, as Nomi pointed out yesterday: Gasoline. It went down 7.7% in July.

In fact, at writing, gas prices in the U.S. have fallen for 57 consecutive days.

On the day the CPI numbers came out last week, the national average price per gallon was $4.01. That was down from $4.68 the previous month.

Gasoline follows the price of oil, which is set in the global marketplace.

In fact, crude oil is the single largest factor influencing gas prices. It accounts for more than 50% of what we pay at the pump.

West Texas Intermediate (WTI) crude, the U.S. oil benchmark, shot above $130 per barrel in March. That was after Russia invaded Ukraine.

But since then, oil prices have retreated. And gasoline prices have followed suit.

WTI prices averaged roughly $94 per barrel last week. That’s a far cry from $130 per barrel just a few months ago.

This drop has been reflected in the gasoline prices used to calculate the monthly CPI figure.

Gasoline makes up just under 4% of the CPI. But gasoline prices are so much more volatile than other CPI components. Prices for it tend to rise and fall more than any other good or service in the CPI basket.

Because of this and the fact that it’s a major component in other CPI categories, the steep drop in gasoline prices pushed “headline” inflation lower.

Now, prices don’t rise or fall in unison. That’s because scarce and desirable goods and services are more prone to increasing prices. Likewise, their prices tend to fall more slowly than other items.

While gasoline can certainly be both scarce and desirable, the demand for gas is currently down to levels not seen since the 2020 lockdowns.

Meanwhile, shelter is up 5.7%. And food prices have gone up 10.9% over the last year. Nomi has discussed some of the reasons behind this rise in recent essays. (Catch up here, here, and here.)

Consumers can cut back on road trips. But they can’t cut back on food and housing.

Peak Inflation… Are We There Yet?

So, how has the market reacted to all this “good” news?

Well, it was up last Wednesday, when the CPI data came out. The S&P 500 ended the week up 3.3%.

The optimism is because economists originally expected the CPI to increase 8.7% on an annual basis and 0.2% monthly.

And because of the slightly better-than-expected results, many commentators have suggested that we’re past peak inflation.

But are we really?

This is a crucial question. That’s because a peak in inflation would mean the Federal Reserve could soften its hawkish stance on interest rates.

But I think it’s too early to break out the champagne. First, annual CPI still stands at 8.5%.

Second, back in April, when the CPI dropped from its March high of 8.5% to 8.3%, many pundits were calling the peak, too.

But then, inflation went up to 8.6% in May… and 9.1% in June.


In other words, going from 9.1% to 8.5% inflation last month may look “peaky”… but I’d rather wait for a confirmed downtrend.

What This Means for You and Your Money

So, if you have money in the stock market, what should you do?

Between now and the next Federal Reserve meeting in late September, there’s going to be one more inflation report. On September 13, the BLS will release its CPI number for the month of August.

Both Nomi and I will be watching that closely.

If inflation is 8.5% or below, the Fed will likely grasp the opportunity to adopt a less aggressive stance on interest rates.

Another reason they could do this would be if the month-to-month CPI data we talked about earlier remains flat.

As Nomi mentioned during a recent Fox Business interview, the Fed is likely to raise interest rates by only 0.50% in September, down from the 0.75% hikes it announced in June and July.

Needless to say, the market would be very happy about that. That’s because it could mean we’ve reached a key inflection point and inflation could start to go down in earnest.


Lau Vegys
Analyst, Inside Wall Street with Nomi Prins