Sticky Inflation Keeps Fed on Guard Despite July CPI Landing on Target

The July Consumer Price Index (CPI) report has been released, showing that inflation landed on target. However, sticky 3% inflation continues to keep the Federal Reserve (Fed) on guard.

Last month's downside outlier in CPI was mainly due to surprises in rents, cell phones, and car insurance. The latter effect was attributed to a one-time State Farm special dividend to policyholders, which is not repeatable.

The core number and changes in trend are what matter most to the Fed, not just headline inflation numbers. Despite July's CPI being below expectations, Core CPI came in at +0.215%, just slightly above forecasts. This makes last month's outlier an obvious exception rather than a trend.