US July CPI Cools, Lending Support to Warsh’s Cautious Fed Stance

A milder-than-expected increase in the U.S. consumer price index in July has strengthened the case for Federal Reserve Chair Kevin Warsh’s cautious approach to monetary policy.

In an editorial published on August 12, The Wall Street Journal wrote that criticism of the Fed’s recent decision to keep interest rates unchanged had lost force after July CPI rose just 0.1% from the previous month. Core CPI, which excludes food and energy, increased 0.2%.

On a 12-month basis, core CPI rose 2.5%, down from 2.9% in May. Headline CPI was 3.4%, still above the Fed’s 2% target, but the Journal said the spring jump in prices was driven largely by higher energy costs linked to the war in Iran.

The Journal said the Fed’s decision to defer rate increases in June and July may ultimately have been appropriate because underlying inflation is easing. It also highlighted Warsh’s preference for reacting to actual price data rather than relying on forward guidance, or signaling policy moves in advance.

Still, slower inflation has not led to a clear improvement in how households feel about the economy. Real average hourly earnings fell 0.1% in July from a month earlier, and real income growth for many workers over the past year remained limited.

The Fed is set to review July and August inflation data at its September Federal Open Market Committee meeting. If inflation accelerates again, further tightening cannot be ruled out.

The Journal said Warsh will ultimately be judged on whether he restores price stability. If the recent disinflation trend continues, confidence in the Warsh Fed’s handling of monetary policy could also rise.