Critical Inflation Report could show that price increases have eased
People shop at a supermarket as inflation affects consumer prices in New York City, June 10, 2022.
Andrew Kelly | Reuters
Inflation may be finally starting to cool, thanks to lower gasoline prices and supply chain issues fading.
Economists expect the CPI for July to rise 0.2%, down from 1.3% in June, according to Dow Jones. On an annual basis, the pace of consumer inflation is expected to ease in July to 8.7%, down from 9.1% in June.
The Consumer Price Index was reported at 8:30 AM ET Wednesday, and is expected to show that inflation has finally peaked. Investors are also closely watching the report for evidence of how aggressive the Federal Reserve is in raising interest rates to combat price hikes.
You have about four drivers of inflation right now. You have commodity prices. That will go away. You have supply chain issues. That will go away, but you still have housing and the labor market, and that will show up in inflation,” said Anita Markowska, chief economist at Jefferies. Services.” You still have a problem with service inflation, because of the housing and labor shortages. That’s not going away anytime soon, until the Fed can destroy demand and that didn’t happen.”
Excluding energy and food, the CPI is expected to rise 0.5% in July as rents and services rise, but this is down from 0.7% in June. Core CPI is still expected to be higher than June on a yearly basis, rising 6.1% from 5.9% in June.
“Everyone is reasonably primed for good news, so it has to be good news. If it’s not as good as people think, it will be extraordinarily bad news,” said Mark Zandi, chief economist at Moody’s Analytics.
Zandi said he expects headline inflation to rise by just 0.1%. “That would put 8.7% on an annual basis, uncomfortably high, painfully high but moving in the right direction. I think the 9.1% inflation we experienced in June is going to be the peak…a lot of that depends on oil. Prices “.
Falling inflation expectations
This report comes at a time when consumer and market expectations for inflation are declining. A survey from the Federal Reserve in New York this week showed that consumers expect inflation to run at a pace of 6.2% over the next year and an annual rate of 3.2% for the next three years. This is a significant decrease from 6.8% and 3.6% in the June survey results.
“This is one of the most positive aspects of the inflation situation – inflation expectations came in. Consumer expectations came in, and it was no surprise with lower gasoline prices,” Zandi said. “But most importantly, bond market expectations are back…they’re back within walking distance of the Fed’s target. That’s a really good sign.”
Bond market measures of inflation, such as the 10-year break-even point, show investors are seeing a slower pace of inflation than they were just two months ago. According to Ian Lyngen, head of US price strategy at BMO Capital Markets, the 10-year breakeven is now 2.50%, down from a high of 3.07% earlier this year.
This means that market participants now expect an average inflation rate of 2.50% per year over the next ten years. Lingen said the risks surrounding the July CPI are skewed towards a lower-than-expected figure.
“There are a lot of wild cards for us to have a particularly strong opinion of, other than to say that this corresponds to peak inflation and will be traded as such,” he said.
Oil is the primary card
Oil is a key component, and while it has been falling lately, market views of what will happen later in the year have been mixed. The price is highly dependent on geopolitical events and how slow the global economy is. August saw some of the lowest oil prices since the Russian invasion of Ukraine, with West Texas Intermediate crude futures trading at around $90 on Tuesday, away from March near $130 a barrel.
In June, the CPI Energy Index rose 7.5%, with gasoline alone up 11.2%.
Gasoline prices have fallen during July and are down about 20% from the June 14 peak of $5.01 per gallon. The national average price for an unleaded gallon was $4.03 a gallon on Tuesday, according to the AAA.
Housing costs are expected to continue rising in July. In June, the rental index rose 0.8%, the largest monthly increase since April 1986.
“This is not going to come. This will remain consistently high, at least for the next year. We may see the worst acceleration in housing costs by the end of the year,” Zandi said.
Zandi said the dual improvement in supply and cooling demand meant rents could eventually fall.
“One of the reasons is that demand has been damaged. People can’t pay these rents… The other is supply. Multi-family construction is strong,” the economist said.
“It will show up in the housing CPI, but it won’t be until next year,” he said. “That would add about half a point to inflation for the foreseeable future. We have inflation stabilizing at 2.5% on CPI, in the spring of 2024. But half a point of that is housing.”
Markowska said consumers took a break in travel costs in July, which have fallen from the highest pace in the spring and summer. In July, you expect the CPI to fall 7.7% month over month, taking 0.1% from the core CPI.
So far, Markowska said car prices don’t seem to be dropping. “It looks like we have very low inventory levels. I’m not looking for big gains there. Used car prices have been up two months in a row. I think they posted another increase this month and new car prices will go up, she said. Prices seem to be stabilizing.” A lot of people were expecting we would reverse some of the price gains.”
She said supply chain problems are receding. “You see that clearly in a lot of indicators – ISM indicators, prices paid are going down, delivery times are shrinking. Traffic in the Pacific is below levels we saw last year. We’re actually at the peak of the shipping period as well. Everything seems to be moving in the right direction.”
Economists say it is important for the Fed to see inflation ease. But that’s just one report, and the Fed will also look at the upcoming August jobs report and August CPI before raising rates again in September.
Lingen said all of these numbers will decide whether the Fed will raise 50 basis points, as expected before Friday’s strong jobs report, or 75 basis points, in line with June and July increases. The economy added 528,000 jobs in July, double what economists had expected. A base point is 0.01 percentage point.