July's Consumer Price Index remained unchanged from the prior month, a much-needed good sign for Americans feeling the weight of inflation. Jeffrey Cleveland, Principal and Chief Economist at Payden & Rygel, joined Closing Bell to break down the report, and what it could spell for the economy going forward.

Closing Bell

U.S. Inflation Stays Steady in July, Beating Expectations

Welcome back to cheddar news is closing ballot everyone. Well we got some much needed good news. Finally on inflation this morning as july consumer price index data did show an 8.5% increase from the same time a year ago and unchanged actually from the month before. Very positive is better than expected slowdown coming as gas prices continue to drop with the national average hitting $4 a gallon. So joining me now is Jeffrey Cleveland principal and chief economist at investment management from Peyton and regal Geoffrey. It's good to see you on a good day for the economy and the stock market. What is C. P. I day Kristin happy cp. I day. We'll take it. What is this inflation report signal to you? Well, it's good news. It's welcome news. You know, we saw month to month for the last couple of months, pretty strong increases in headline and core measures of C. P. I. So it's good to get a little breather. So that flathead headline reading, do I think primarily to gas prices which continue to drop in the month of august, so that's good. We should see that continue. Um, the slowdown in core though, I'm a little concerned here, Some of the things that are very sticky in the core data namely rents, those components continued to move up .6.7% month to month and I think that's gonna be a persistent problem, through the through the rest of the year. So it's, it's possible that the july data that we just got was just a breather and that core month to month will pick back up into the fall. That's what I'm I'm worried about. So this might be just a temporary I don't know lull for for the financial markets here. So let's appeal that a little bit more because gas prices did drop dramatically and we know that higher gas prices had been pushing these figures higher and higher C. P. I. On a monthly basis. Certainly one of the big contributors to a 9.1% gain that we saw in june from the sea same time a year ago. I thought it was also interesting Jeffrey as travel demand soared this summer. I mean I couldn't look at anything on social media without seeing someone's awesome vacation. We saw hotel prices come down airfare come down as we're seeing here on this screen, rental car prices actually coming down as well. So it sounds like perhaps at least during the busy summer travel season those prices were able to fall back as well. I wonder if those two might pick up going forward. I think you're right. I think next month those could pick back up the consequence of that would be overall core inflation picks up from 0.3 month to month. It point it picks back up to maybe 0.0.4 or 0.5% month to month next month. And then that's that's uncomfortable. So when you think about it if that would persist through year end at the end of the year, we're still talking about Core CPI I north of say 5% year on year, maybe 5.5% year on year. The reason that matters is because it's way above the Fed's target. The Fed wants to see Core CPI I much closer to 2.5% not over 5%. So that's why I think maybe the celebration today could be premature. It could be premature. It's good news. Gas prices are lower. I think that's great for consumers. But it's that core inflation kristen that's really interesting. And of course we have to remind ourselves the Fed's long term target is 2%. So we've got a long way to go, Jeffrey, as you rightly point out to actually get back to that particular level as the chief economist at Peyton and regal. How should americans prepare for prices in the future? Especially as the school year is set to start? Well, this is tough. I mean inflation from my perspective is a bad thing. It could because it touches everyone. Um doesn't matter. Rich, poor, high income, low income when you see prices going up 56% a year. That is pretty much eroding all of personal income. The jobs report we got on friday as you probably remember showed average hourly earnings up 5.5% 5.2% year on year. So 5% core inflation rate is going to eat through that income. So this is a very difficult situation. I think the bottom line for us is it prob probably does mean slower economic growth in the second half of the year. Maybe we're on the cusp of a downturn because consumer the consumer can only stand with stand so much if you're eroding their income they're gonna have to pull back on spending at some point. So I think people see this data the stock markets higher today. This is probably very good for biden's approval ratings heading into the midterm and they might think recession why was there so much drama about a recession? Could we still see a recession? Yes we could. I mean the two negative quarters that we already have seen. Q. One and Q. Two for G. D. P. Were negative. That typically only happens when you do have a recession either underway or right around the corner so that right there should get your your spidey sense up in terms of the recession. Also layoffs have started to pick up from pretty low levels. We look at initial claims, we'll get that tomorrow morning. Initial claims for unemployment insurance that's a proxy for layoffs that was very low in the earlier part of the year but it's picked up over the spring and into the summer months. So I think that's something to watch very carefully. So it's still possible that we'll have a recession. It's also possible that we sneak by without a recession. kristen we did that in the mid 19 nineties, the economy slowed but didn't tumble into recession. So it's not inevitable. It's not inevitable. I would just say nobody, nobody really knows. We just have to watch data month by month here. Well Jeffrey, my last question to you is what do you think is the right move for the Fed going forward? We have the better than expected jobs report last week, some strong services sector data last week as well. Obviously this inflation report will get a whole another month of data before the Fed's september medium but based on the clues that you're getting, what do you think is the right way for the Fed to proceed at this time? Well inflation is high, it's way above their target and so they cannot afford to be patient Kristin. They tried that already last year and they were late and then they had to hike to catch up. And I think the other thing really important for viewers to know you have to put on your central bank. Hat how do they look at inflation? I think maybe they won't say this in public christian, but they think that getting the unemployment rate up and getting wage growth to slow is a key avenue to bring inflation down and job the job report we saw on friday, the unemployment rate actually fell, it didn't rise. So if you put on your central banker hat you still have work to do to slow the economy to get the unemployment rate up, to get to get inflation down there. Not done. So I know there's some enthusiasm and financial markets. The Fed may already have done enough. They won't have to do much more, but I don't see that. That's not my read of what's going on here. Jeffrey Cleveland. Great to get your take. Very insightful. Thank you. Jeffrey is a principal and chief economist at the investment management firm Payton and re go on a good day for the stock market.