July Inflation Data Keeps "Soft Landing" in Play - Here's What It Means for Your Portfolio

Disinflation Continues, Raising Odds of Sept Rate Cut
The latest inflation figures showed continued progress in the battle against rising prices, keeping hopes alive for a "soft landing" scenario. July's consumer price index rose 2.9% from a year ago, down from 3% in June and the lowest reading since early 2021.

For investors, the disinflation trend signals the Federal Reserve is likely to start cutting interest rates at its September meeting. Markets are pricing in at least a 25 basis point cut, with many betting on a larger 50 basis point move. Rate cuts would relieve some of the intense policy tightening pressure that has hammered risk assets over the past year.

Sponsor

Goods Inflation Normalizes, Reducing Overtightening Risks
The easing in goods inflation is particularly encouraging, signaling that pandemic supply chain disruptions have largely normalized. Categories like used cars saw double-digit price declines versus a year ago. This reduces the risk that the Fed overtightened policy based on inflation levels that were heavily impacted by transitory supply shocks.

Housing Costs Remain a Concern, For Now
However, housing costs remain a persistent problem child, with the shelter index up 5.1% year-over-year and accounting for over 70% of core inflation. But real-time market rent data suggests this too shall pass, even if sticky CPI methodology is slow to reflect improving realities.

Services Inflation is the Big Wild Card
Perhaps the biggest uncertainty going forward is in services inflation, which is highly sensitive to labor costs and wages. A continued cooling in the job market should help moderate too-high services price pressures. But if this component fails to cooperate, it could force more Fed tightening down the road.

"Soft Landing" Hopes Remain Credible
For now though, the July CPI print keeps the "soft landing" narrative alive and kicking. Inflation is retreating without necessitating an economic collapse or severe recession to break the wage-price spiral. That's good news for portfolio diversification.

Sponsor

Profit from the tech behind ChatGPT (Free Report) These 5 stocks have been hand-picked by Zacks Senior Stock Strategist and are at the heart of an especially brilliant sector of Artificial Intelligence that could bring extreme growth to your portfolio. The earlier you get in, the greater your profit potential. So I urge you to download our just-released Special Report with 5 top tickers to buy ASAP… Click here now to claim your copy FREE»

Sector Relativity Based on Inflation Trends
Within markets, subsectors experiencing persistently high inflation, like vehicles/insurance, medical care and personal care, may continue to underperform. While areas benefiting from easing price pressures, like consumer staples and discretionary, may have more upside. The data suggests no need to make radical portfolio adjustments yet.

But Watch Out for Inflation Upside Surprises
But one or two hotter-than-expected inflation readings could disrupt the cautiously optimistic path implied by July's figures. Any major upside surprises on prices would likely force markets to re-price far less aggressive rate cut bets for September and beyond. That could prompt volatility across asset classes.

A Goldilocks Scenario, For Now
For now, investors can embrace the July inflation update as a Goldilocks scenario that keeps the "soft landing" hopes credible, if still fraught with uncertainty. Reasonable confidence in moderating price pressures ahead is warranted based on these figures. Just don't get too complacent, as always.

YOU NEED TO READ THIS NEXT

You Won't Believe America's Next Big Bet

Congress, President Biden, and billionaires like Bill Gates and Peter Thiel are pouring money into one surprising technology – with early estimates expecting it to grow 12,000% starting now.

Incredibly, most Americans don't know about it, but that's about to change. Click here to see how it could become the No. 1 investment of the next decade.