Summer vacation was in full swing last week with equity trading volumes more than -10% below year to date averages. Still the economic data on the week was sufficient to push 10-year U.S. Treasury yields to their highest weekly close of the year. July inflation data appeared mostly in-line by various measures but the implications to monetary policy seem to me to be more nuanced.

July CPI data (August 10) found consumer prices increased 0.2% from June and 3.2% over the prior year. This headline 12-month CPI measure was slightly higher from June. Core CPI remains stubbornly higher at 4.7% above the year ago level having increased 0.2% in July.

Looking ahead to the August reading which will be released prior to the next FOMC meeting, the August 2022 roll month for headline CPI is 0.2% while the August 2022 core CPI is 0.6%. Assuming an August 2023 core CPI print of 0.2%, the 12-month core CPI would drop to 4.3%.

Another nuanced detail to the CPI report is the elevated stickiness in services inflation. Non-energy services prices increased 0.4% in July and are 6.1% higher in the last 12-months. These numbers are well above the 2% long term policy target rate and have not shown indications of decline. Fed Chairman Powell has consistently spoken of the Fed’s focus on non-housing services inflation with the implied risk of a wage-price spiral.

July PPI data (August 11) was less ambiguous coming in hot relative to expectations and demonstrating acceleration in price trends. July PPI increased 0.3% from June and 0.8% over the past 12-months. The core PPI numbers were less concerning at 0.2% increase m/m and 2.7% increase y/y. I will not overweight a single month acceleration in PPI data.

Altogether I view the data as very much keeping the September Fed meeting live for another ¼ point hike. I think the current CME FedWatch probability of 11.5% for a ¼ point increase understates the likelihood for further restrictive monetary policy at the next meeting.

In addition to another target rate increase in September, I think there is a risk of further creep higher in the Summary of Economic Projections (SEP) for Fed Funds in the cycle. For me, the June sell off was a response to the SEP increase in terminal rate of 50 bps. Another bump in SEP Fed Funds in September could cause a similar reaction. We all have some time to ponder these issues as market participants drift back from the beach over the next couple weeks and volumes normalize.