Fed shifts from inflation-only stance as CPI cools, gold gains 1.2%

Wednesday's CPI report showed broad inflationary pressures easing, but last Friday's dismal jobs data means the Federal Reserve can no longer focus on inflation alone ahead of its September meeting, Natixis economists said.

"This is still an inflation-first Fed, but given last Friday's jobs numbers, it can no longer be an inflation-only Fed," Christopher Hodge and Selin Aker, economists at Natixis, said.

The in-line CPI data fell into the "encouraging category" after the weak employment report, the economists wrote. Shelter costs were again subdued, helping offset an unusual rise in education and communication commodities and recreational commodities. Core goods rose 20 basis points on the month after two prior negative readings, a trend Natixis does not expect to continue. The supercore index, which tracks underlying inflationary pressures, bounced back from an "absurdly low" June reading but remained contained at 19 basis points on the month.

The three-month annualized inflation rate has been lower for four straight months, with broad-based pressures continuing to wane, though progress toward the Fed's 2 percent target has been slow and inconsistent. The disinflationary trend is moving in the right direction, Hodge and Aker wrote, even as the pace remains uneven.

Dual mandate back in play

Last week's nonfarm payrolls report, released Friday, was "dismal" enough that the definition of an encouraging CPI print expanded, the economists said. Both sides of the Fed's dual mandate — maximum employment and price stability — are now back in play between now and the September Federal Open Market Committee meeting.

"All Fed meetings in the near future will need to price in the possibility of a surprise," Hodge and Aker said. The economists affirmed their call for an extended hold, pointing to a slow, gradual drift toward target inflation, a cooling consumer sector, and a more precarious jobs outlook.

The shift in the Fed's policy calculus rippled through markets. Gold prices shot to multi-month highs after the CPI release, with spot gold reaching a session high of $4,441.31 around 9 am ET. Spot gold last traded at $4,421.11, up 1.21 percent on the daily chart, as investors weighed the prospect of a more balanced Fed stance that could open the door to rate cuts later this year.

The transmission chain runs through the labor market and price data alike. A cooling consumer sector, combined with a more precarious jobs outlook, gives the Fed room to hold policy steady while it waits for inflation to drift toward target. But the risk of a surprise — in either direction — means every data release between now and September carries added weight.

The supercore reading is central to the Fed's calculus because it strips out the most volatile components and offers a cleaner view of the underlying demand pressures that policymakers watch closely. At 19 basis points on the month, the index remains well contained, suggesting the disinflationary impulse has not been derailed by the recent uptick in core goods. That combination — subdued shelter costs, contained supercore, and a cooling labor market — gives the Fed latitude to hold rates steady while it waits for more confirmation that inflation is durably heading toward target.

Tomorrow's producer price index will offer a read on July PCE, with August CPI and jobs numbers still to come before the September meeting. If inflation continues to cool while the labor market weakens further, the case for a rate cut at the September FOMC meeting would strengthen; if price pressures prove stickier, the Fed's extended hold would extend further into the year.

This article is for informational purposes only and does not constitute investment advice.