Severe inflation reports may suggest price increases have eased

People shop in a supermarket as inflation affects consumer prices in New York City, June 10, 2022.

Andrew Kelly | Reuters

Inflation may have finally cooled down, thanks to falling gas prices and fading supply chain problems.

Economists expect the consumer price index to rise 0.2 percent in July, down from 1.3% in June, according to Dow Jones. Compared to last year, the consumer inflation rate in July is expected to slow to 8.7%, down from 9.1% in June.

CPI is reported at 8:30 a.m. ET Wednesday, and is expected to show inflation has finally peaked. Investors are also closely watching the report for clues about how aggressive the Federal Reserve is in raising interest rates to combat rising prices.

“You have about four inflation triggers right now. You have commodity prices. That will go away. You have supply chain problems. That will go away, but you still have housing and “You still have problems with services inflation, and that’s driven by housing shortages and shortages,” said Aneta Markowska, chief economist at Jefferies. labor. That’s not going to go away anytime soon, until the Fed managed to kill demand and that didn’t happen.”

Excluding energy and food, CPI is expected to rise 0.5% in July as rents and services rise, but down from 0.7% in June. Core CPI is still forecast to be higher in June compared to the same period last year, up 6.1% from 5.9% in June.

Mark Zandi, chief economist at Moody’s Analytics, said: “Everybody’s ready for good news, so that has to be good news. If it’s not as good as people think, it’s going to be good news. unusually bad”.

Zandi said he expects inflation to rise by only 0.1%. “That would put the whole year at 8.7%, uncomfortably high, painfully high but on the right track. I think the 9.1% inflation rate we have in June will be is the pinnacle… much of this depends on oil prices,” he said.

Inflation expectations fall

The report comes as both consumer and market expectations for inflation fall. One survey from the New York Federal Reserve this week shows that consumers expect inflation to increase at a rate of 6.2% next year and 3.2% annually over the next three years. That’s a huge drop from the results of 6.8% and 3.6% respectively in a survey in June.

“That’s one of the most positive aspects of the inflation situation – inflation expectations have come in. Consumer expectations have come in, it’s not surprising that gas prices have dropped,” Zandi said. “But more importantly, bond market expectations are back… They’re back a long way from the Fed’s target. That’s actually a good sign.”

Bond market indicators of inflation, such as the 10-year breakeven, show that investors see a slower pace of inflation than they did just a few months ago. The 10-year breakeven is now 2.50%, down from a high of 3.07% at the start of the year, according to Ian Lyngen, head of US interest rate strategy at BMO Capital Markets.

That means market participants now expect an average inflation rate of 2.50% annually over the next 10 years. Lyngen said the risks surrounding the July CPI skewed towards an even lower-than-expected number.

“There are too many wild cards for us to have a particularly strong opinion, other than to say this is consistent with peak inflation and will be traded as such,” he said.

Oil is the wild card

One major driver is oil and although it’s been falling recently, the market’s view is divergent on what will happen at the end of the year. Prices are highly dependent on geopolitical events and the degree of slowdown in the global economy. August saw some of the lowest oil prices since Russia invaded Ukraine, with West Texas Intermediate Crude Oil Futures traded at around $90 on Tuesday, better than March near $130 per barrel.

In June, the CPI increased by 7.5%, gasoline alone increased by 11.2%.

Gasoline prices have fallen in July and are down about 20% from their June 14 peak of $5.01 a gallon. The national average price for a gallon of unleaded is $4.03 per gallon on Tuesdayaccording to AAA.

Housing costs are expected to continue to rise in July. In June, the rent index rose 0.8%, the biggest monthly increase since April 1986.

“That’s not going to happen,” Zandi said. The numbers will remain consistently high, at least next year. We could see the worst acceleration in housing costs later this year. .

Zandi says that a dual improvement in supply and a cooling of demand mean rents could end up being moderate.

“One reason is because demand suffers. People can’t pay these rents…. and the other reason is supply. Multifamily building is strong,” the economist said.

“That will show up in the housing CPI, but not until next year,” he said. “That should add about half a point to inflation for the foreseeable future. We have settled inflation at 2.5% on CPI, in spring 2024. But half of that is housing. .”

Markowska said consumers saw a drop in travel costs in July, down from spring and summer peaks. In July, she expects the CPI airfare index to fall 7.7% month-on-month, taking 0.1% from the main consumer price index.

So far, Markowska said auto prices are unlikely to fall. “We seem to have extremely low inventory levels. I’m not looking for big gains there. Used car prices, they’ve gone up two months in a row. I think they’ll go up again in the next few weeks.” this month and the price of new cars will go up again,” she said. She added that prices appear to be stabilizing. “I think a lot of people were expecting us to reverse some of the upside.”

She said supply chain problems have been eased. “You see that pretty clearly in a lot of metrics – the ISM, prices are falling, delivery times are shortening. Traffic across the Pacific is lower than we saw last year. We’re also really in peak shipping. Everything seems to be moving in the right direction,” she said.

Economists say it is important that the Federal Reserve sees inflation fall. But this is just one report and the Fed will also look at the jobs report next for August and the August CPI before raising rates again in September.

Lyngen said all of those numbers will determine whether the Fed raises 50 basis points, as was predicted ahead of Friday. strong jobs report, or 75 basis points, matching June and July gains. The economy added 528,000 jobs in July, double what economists had forecast. The basis point is 0.01 percentage points.

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