Dive Brief:

• Inflation eased last month, the Labor Department said Thursday, with the core consumer price index excluding volatile food and energy prices rising 0.2% in the smallest consecutive monthly gain in more than two years.
• Core CPI on an annual basis rose 4.7% in July, still more than twice the Federal Reserve’s 2% inflation target but an improvement from the 4.8% increase in June. Core CPI has steadily slowed, gaining 4.1% on an annual basis during the three months through July and likely assuring Fed policymakers of progress in their aggressive 16-month effort to quash price pressures, economists said. 
• “Three decent core CPI prints is not definitive, but we think it will be enough to dissuade the Fed from another hike” at its Sept. 19-20 policy meeting, barring a big surge in U.S. payrolls this month, Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, said in a research note. Core CPI will likely rise 0.1% to 0.2% this month, he predicted.

Dive Insight:

The Fed raised the benchmark interest rate last month to a range between 5.25% and 5.5% after pausing monetary tightening in June to assess the impact from 10 consecutive hikes since March 2022.

Policymakers in June penciled in one more quarter-point increase, with their median estimate indicating a 5.6% federal funds rate by the end of 2023.

Traders in interest rate futures predict a softer policy approach, setting 91% odds that the central bank next month will hold the federal funds rate at the current level and 68% odds of no additional hikes through December, according to the CME FedWatch Tool.

Yet factors such as “base effects” cloud the policy outlook. Measurable progress against inflation will naturally stall after unusually high price pressures from mid-2022 stop influencing 12-month data.

Also, gains in shelter prices have remained stubbornly high this year, rising 0.4% last month and fueling two-thirds of the increase in core CPI during the period, and 90% of the 0.2% increase in the so-called headline CPI including food and energy prices, the Labor Department said.

“Rents just don’t seem to be slowing by much at all on a month-to-month basis,” Fitch Ratings Chief Economist Brian Coulton said Thursday in an email. “Given the 34% weight of shelter in CPI, this is significant.”

Finally, data released today does not fully capture the 7% surge in the price of gasoline last month.

The Labor Department data, by including the average price for any given month, understates the harm to many companies from gains in the cost of gasoline that began after mid-July and persisted into August.

The price of gasoline rose 0.2% in July, or twice the rate of June, while fuel oil increased 3% after declining throughout the first half of 2023, the Labor Department said.

Union Pacific, as well as other transportation companies, is girding for a jump in energy costs and a continued decline in demand.

The company benefited from a 29% decline in fuel costs during the first six months of the year, CFO Jennifer Hamann said during the company's quarterly earnings call on July 26.

Yet the outlook on energy costs has shifted, Union Pacific CEO Lance Fritz said during the call. “Fuel is going to be a real headwind in the back half” of 2023.

Fuel costs at current levels would likely set back the company by 50 cents per share during the final two quarters of the year, Hamann said.

Werner Enterprises faces the prospect that demand will continue to decline beyond the second quarter, as well as the possibility of additional Fed tightening and reduced lending, CEO Derek Leathers said in an Aug. 3 earnings call.

“We remain cautious about consumer behavior given mixed data points and themes impacting spending, particularly for goods versus services,” Leathers said. “We expect there will be an accelerated pace of freight capacity exiting the market.”

On the plus side, “inflation seems to be waning a little,” Leathers said.

Old Dominion Freight Line has blunted the harm from inflation by sharing the rising cost pressures with customers, Adam Satterfield, executive vice president of finance, said during the company’s July 26 earnings call.

“We have a cost-based process, and we talk about our cost inflation with customers and the need to have a price increase that is 100 to 150 basis points above our cost inflation every year to support the significant investments that we're making in service center capacity and technologies,” Satterfield said.

“It kind of makes sense if you sit across the table and have that conversation,” he said.