Inflation report could show CPI is moderating as fuel and commuting costs drop

A customer buys eggs in a Kroger grocery store on August 15, 2022 in Houston, Texas.

Brandon Bells | beautiful pictures

Inflation remains hot but is expected to ease in August, driven by lower gasoline prices, improved supply chains and reduced travel costs.

The Consumer Price Index is released on Tuesday at 8:30 a.m. ET, and that report could be a bit messy as key inflation is expected to fall while core inflation, excluding energy, is expected. and food, will increase. The report is also important because it is expected to influence the Federal Reserve’s decision on a rate hike next week – and more importantly, over the long term.

CPI for all commodities is forecast to actually decrease by 0.1% month-on-month in August, after read regularly in July, according to Dow Jones. On a yearly basis, headline CPI will then run at a pace of 8%, down from 8.5% in July.

But excluding gasoline, the core consumer price index is expected to rise 0.3% from July. On a year-over-year basis, that would make a 6% gain, even hotter than July’s 5.9% gain.

For the Federal Reserve, the report is supposed to confirm that it needs continue the fight against inflation with next week’s rate hike of 0.75 percentage points, the third time in a row. If inflation data is weaker than expected, some economists say there’s a chance the Fed could raise just half a percent.

“If anything, the risk is it could weaken a bit,” said Aneta Markowska, chief economist at Jefferies. “I have energy commodities down 10.2%. That’s going to be down by half a percent. I think the core is going to be more important.”

See prices at the pump

Gasoline prices are the biggest driver of the decline in energy. Since peaking at $5.01 in mid-June, the national average for unleaded gas has fallen throughout the summer, to an average of $3.71 per gallon on Monday, according to AAA.

Markowska expects headline CPI to fall 0.2%, but a core gain of 0.3%. Shelter is one of the areas expected to rise, while used car prices are forecast to fall.

“I think we’re going to see a repeat of airfares and hotel prices,” Markowska said. “They pulled the core CPI down last month. It looks like we’re going to see an 8% drop in airfares,” said Markowska. “. “They’ve grown 40% from March to May. We’ve only released a portion of it.”

Economists say the fundamental impact of comparing the numbers to last year is behind the spike in core inflation in August.

“Given the underlying impact, annual core inflation is likely to accelerate over the next two reports, which will upset the Fed,” wrote Blerina Uruci, chief US economist at T. Rowe Price. . That doesn’t matter to Fed officials, she said, as they will be more focused on momentum and will be monitoring three- and six-month annual rates.

But they are also sensitive to what it will look like to the public and Congress. She added:

Strategists say the Fed’s September 21 rate decision could be influenced by the August CPI report, but the details inside that report could be more important to what they say about the outlook. long-term hope. That can help shape expectations for the Fed’s closing or ending rates when it stops rising.

Find the end game

Market expectations for the Fed’s prime rate have inched higher, and in the futures market, it’s forecast to hit 4% early next year. Markowska expects it to hit 4% to 4.25% in January.

“This is where we start looking to see if there is a shift in core models where the Fed could take a knock,” said Diane Swonk, chief economist at KPMG. She expects the Fed to raise the target range of the backed fund to 75 basis points next week. That would bring the target range of the fund on offer from 3% to 3.25%. The basis point is 0.01 percentage points.

“This makes them follow the policy very closely,” Swonk said. “Then the question is how tight they want to be.”

This is an important question for markets, as some experts predict the Fed will pause later this year. Others expect a pause early next year, and some investors believe the Fed will begin cutting rates in the second half of next year.

Fed officials, led by Chairman Jerome Powell, have emphasized that The Fed will raise rates and keep them there. However, the market is still betting that the Fed will not be as tough as they say.

“I don’t think this report is going to change much for the Fed,” Markowska said. “I think the problem for the Fed is that even if inflation is slowing, growth is picking up in part because of falling energy prices.” . “That drives buying power.”

She said that consumers appear to be redirecting the dollars that would be used to fuel their cars to other goods and services. That could keep the economy hotter than the Fed wants, and she now expects third-quarter growth of 3% or more.

“It was growth above the trend at a time when the Fed needed to design growth below the trend,” said Markowska.

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