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Inflation reading ‘the first month of relief in a long time,’ economist says

Bank of America Chief U.S. Economist Michael Gapen joins Yahoo Finance Live to discuss July Consumer Price Index (CPI) data, national gas and energy prices, inflation, Fed tightening, and the outlook for the economy.

Video transcript

BRAD SMITH: Let's stay on this topic though with the latest CPI report. Let's bring in Bank of America Chief US Economist Michael Gapen. Michael, I want to get your headline reaction here from what you've seen in today's CPI report.

MICHAEL GAPEN: Well, obviously, the first month of some relief in quite some long time. So the decline in energy prices welcomed and certainly forecasted and projected by all the declines at the pump we've seen in recent months.

The big surprise, of course, in used cars, right? If the Fed-- as you've been speaking, the Fed's soft-landing scenario would be greatly improved if we've got some of these durables prices rolling over. So to have used car prices fall-- it's only one report, we'll see if it continues-- but that's a very positive sign.

Still some stickiness in services. But I think we all know that that's a more slow-moving category and it'll take a lot more time to adjust. But overall, a very beneficial report for the economy.

JULIE HYMAN: Definitely a beneficial report for the economy, Michael. What about for the Fed? In other words, does the Fed have anything to do with the slowing of price gains that we've already seen?

I mean, if you look at it, it's in fuel. It's in things that we've been talking about a lot on the individual company basis. Things like apparel, for example, that people aren't buying as much of. But that seems to have less to do with the Fed than just the fact that prices have gotten so high that people are reallocating their resources. Can the Fed take any credit for this report?

MICHAEL GAPEN: I mean, not necessarily, but I don't think the Fed was saying that they needed to do all the work to bring inflation lower. They just wanted the domestic economy to soften and contribute to lower inflation. I think the Fed felt that energy prices would be coming down, as you mentioned, the rebalancing of spending back to services should take some of the pressure off goods. So the shift in relative demand from the pandemic will run its own course.

But I don't think the Fed was ever saying, hey, it's all on us. We've got to get it all from the US Labor market. So maybe the Fed's policies haven't shown up yet in inflation. But we're getting help from other components. And we need help there, too.

BRIAN SOZZI: Michael, one of the most under-reported things, I would say, in recent weeks has been this decline in gas prices. Now, below $4.00 a gallon here for the national average for regular unleaded. What type of tailwind is this likely to provide for the economy moving forward?

MICHAEL GAPEN: A positive one. I think part of the conundrum here-- or the issue is that the weaker the rest of the world gets, it actually benefits the US because one of the reasons commodity prices have come down is because of expectations of weaker global growth. That feeds directly into lower gas prices and helps out consumer spending.

So it's a tailwind to a consumer that's been dealing with higher prices. And it allows them to have more money left for discretionary purchases.

BRAD SMITH: What this still comes back to as well, Michael, is how much people are spending on the necessities. And one of the most basic necessities, shelter. And particularly, in what we've seen in this most recent report, it does seem like the shelter index continued to rise, but did at a smaller increase. And so in the slowing that we're seeing there, is that going to provide the opportunity for-- in other places of the economy, for some of the consumers to maintain or regain, I should say, some of their confidence?

MICHAEL GAPEN: Possibly. I think, it's-- I mean, that's going to be a more slow-moving category. It's going to take more time for shelter to come back down. But yes, if it does, it certainly would provide more discretionary purchasing power. I think we expect that one to move, say, kind of last in the chain. It tends to lag what's happening, rents by about six months or so.

So we've got good news here from energy and at least one or two categories in goods. Services will likely-- you know, I wouldn't look for tremendous amount of relief there for another six to nine months.

BRIAN SOZZI: And Michael, going back to the market reaction to the CPI, stocks are ripping higher in the premarket Dow, over 400 points. But perhaps you can just bring a little sanity, I think, back to this initial market move. So the Fed is still going to move forward with interest rate hikes. And at their next couple of meetings, do you still think they can move forward with 50 basis point increases?

MICHAEL GAPEN: I do. I think this reduces the risk of, say, another massive 75 basis point hike in September. We'll see where the rest of the data comes in. The Fed will still be tightening. It's just a situation where the degree to which they need to tighten can come in more modest clips, maybe 50 basis point increments than say 75. So the Fed will still be hiking. But this is a report that says, you know, they can at least take a breather for this month.

JULIE HYMAN: Yeah, and we can all take a breather as well, perhaps a little bit when it comes to some of these price moderation-- price increase moderation, I guess we'll put it that way. Bank of America Chief US Economist Michael Gapen, thanks so much for your perspective on this. Really helpful as we look at this report.