In The Motley Fool’s Latest Research, Core Inflation Is at 2.9% — Here’s Why Investors Should Pay Attention to This Important Number

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The U.S. Department of Labor recently disclosed its monthly consumer price index (CPI) for June. According to the report, overall inflation grew by 2.7% compared to the same period last year. However, when looking at core inflation, which does not account for changes in food and energy prices, the increase was a higher 2.9%.

Economists, such as those at the Federal Reserve, pay close attention to the Core Consumer Price Index (CPI) because it excludes fluctuating prices of food and energy, which can skew the data. Last month’s Core CPI revealed a slight increase, but it remains significantly lower than the levels seen in 2022.

Despite efforts to lower it, the persistently high consumer price increase remains significant for individuals, businesses, our economy as a whole, and even the stock exchange.

The Fed’s bind

The Federal Reserve has a dual mandate: to achieve price stability and maximum employment.

The Federal Reserve aims for a sustained inflation level of 2% over time. They gauge their progress in this area by using the Personal Consumption Expenditures Price Index, which is closely related to the actual rate of inflation they aim to control.

A potential increase in inflation rates might indicate a prolonged rise in the Consumer Price Index (CPI), especially since businesses like Walmart could transfer increased tariff costs onto consumers.

Keeping interest rates unchanged by the Fed instead of reducing them could lead to increased borrowing costs for consumers on certain types of loans. This could potentially decrease consumer spending, which is a significant contributor to the U.S. economy, accounting for more than two-thirds. If this happens, economic growth might be negatively impacted.

Increased short-term interest rates can affect the broader stock market significantly. Typically, the direction of interest rates and stock prices moves inversely. This means that when interest rates rise, stock prices often decrease.

Economic fallout

Under normal conditions, a surge in inflation often indicates an economy running too hot. In response, the Federal Reserve might increase short-term interest rates as a means to boost the cost of loans and help bring down the overall economic activity.

Instead of taking bold action, the central bank is adopting a more measured stance this time due to the U.S. economy’s indicators suggesting a slowdown. This predicament makes the Fed’s decision-making process even more challenging, and it appears they will maintain current rates until inflation subsides. Previously, the central bank had been on pause, but it would have reduced rates if not for the uncertainty caused by tariff implementations, as stated by Chairman Jerome Powell.

It requires careful navigation for the Federal Reserve to fulfill its two-part mission. Delay action, and there’s a risk of triggering an economic downturn. Conversely, if the Fed reduces interest rates prematurely, consumer spending might pick up speed, driven by cheaper loans. This could lead to increased inflation rates.

Navigating this setting could prove difficult for equity investors. Yet, by focusing on robust companies that possess clear competitive edges, you might discover attractive deals as events unfold.

The effect on companies

Higher inflation doesn’t just affect consumers. It also impacts companies’ sales and profitability.

In an effort to manage increased expenses, businesses frequently respond by raising their product prices. This move may potentially decrease the desire for such goods, especially non-essential items.

If companies cannot boost prices sufficiently to cover their escalating costs, their expenses will rise, leading to reduced profit margins. This is particularly relevant today because numerous businesses have already hiked prices recently, and consumers are cautious about further price hikes.

Conversely, robust companies are likely to weather a short-term drop in profits. Interestingly, they might even grow more powerful as less resilient rivals succumb to the challenges ahead.

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2025-07-25 12:43