Inflation spiral set to break in July, helped by lower energy prices

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

andrew kelly | Reuters

Inflation may finally subside, thanks to falling gasoline prices and the disappearance of supply chain problems.

Economists expect July’s consumer price index to have risen 0.2% from 1.3% in June, according to Dow Jones. Year-over-year, the pace of consumer inflation in July is expected to fall to 8.7% from 9.1% in June.

The CPI is released at 8:30 a.m. ET on Wednesday and is expected to show that inflation has finally peaked. Investors are also watching the report closely for clues about the Federal Reserve’s aggressiveness in raising interest rates to combat rising prices.

“You’ve got about four inflation factors right now. You’ve got commodity prices. It’s going away. You’ve got supply chain issues. It’s going away, but you still have housing. and the labor market, and that’s going to show up in services inflation,” said Aneta Markowska, chief economist at Jefferies. “You still have a problem with services inflation, and that’s because of housing shortages and manpower. It’s not going away any time soon, until the Fed manages to destroy demand and it hasn’t happened.”

Excluding energy and food, the CPI is expected to rise by 0.5% in July due to higher prices for rents and services, but this is down from 0.7% in June. Core CPI is still expected to be higher than June on a yearly basis, gaining 6.1% from June’s 5.9%.

“Everyone is ready for reasonably good news, so it has to be good news. If it’s not as good as people think, it’s going to be exceptionally bad news,” said economist Mark Zandi. chief at Moody’s Analytics.

Zandi said he expects headline inflation to rise just 0.1%. “That would put year-over-year at 8.7%, uncomfortably high, painfully high but going in the right direction. I think the 9.1% inflation rate that we suffered in June will be the peak… it largely depends on the oil price,” he said.

Falling inflation expectations

The report comes as consumer and market expectations for inflation are falling. A New York Federal Reserve survey this week showed consumers expect inflation to continue at a 6.2% pace over the next year and an annual rate of 3.2 % over the next three years. That’s a sharp drop from respective results of 6.8% and 3.6% in a June survey.

“That’s one of the most positive things about the inflation picture – inflation expectations have arrived. Consumer expectations have arrived, which is not surprising with lower oil prices. gasoline,” Zandi said. “But more importantly, bond market expectations have come back… They’re back within reach of the Fed’s target. That’s a very good sign.”

Bond market measures for inflation, such as the 10-year breakeven, show investors are seeing a slower pace of inflation than just a few months ago. According to Ian Lyngen, head of US rates strategy at BMO Capital Markets, the 10-year breakeven point 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 10 years. Lyngen said risks around the July CPI are leaning towards an even lower number than expected.

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

Oil is the joker

A wild card is oil and although it has been falling lately, market views are divided on what will happen later in the year. The price is highly dependent on geopolitical events and the downturn in the global economy. August saw some of the lowest oil prices since Russia invaded Ukraine, with West Texas Intermediate crude futures trading at around $90 on Tuesday, a far cry from the month of March at nearly $130 a barrel.

In June, the CPI energy index rose 7.5%, with gasoline alone rising 11.2%.

Gasoline prices fell through July and are down about 20% from the high of $5.01 per gallon on June 14. The national average price for a gallon of unleaded was $4.03 per gallon on Tuesday, according to AAA.

Shelter costs are expected to have continued to rise in July. In June, the rent index rose 0.8%, the largest monthly increase since April 1986.

“It’s not happening. It will remain consistently high, at least until next year. We could see the worst acceleration in housing costs by the end of the year,” Zandi said.

Zandi said the dual improvement in supply and cooling in demand means rents could eventually moderate.

“One reason is demand is hurt. People can’t afford those rents…and the other is supply. Multifamily 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 will add about half a point to inflation for the foreseeable future. We have inflation coming in at 2.5% CPI, spring 2024. But half a point of that is housing. “

Markowska said consumers benefited from a break in July travel costs, which fell from the higher pace of spring and summer. In July, it expects the CPI airfare index to fall 7.7% month-on-month, taking 0.1% from the core CPI.

So far, Markowska said car prices don’t seem to be falling. “We seem to have extremely 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’re showing another increase this month and new car prices will be up too,” she said. She added that prices appear to be stabilizing. “I think a lot of people were expecting us to undo some of the price gains. “

She said supply chain issues have eased. “You see that pretty clearly in a lot of indicators – ISM indices, prices paid are down, delivery times are getting shorter. Pacific traffic is down from the levels we saw last year. We’re also in a peak shipping period. Everything seems to be going in the right direction,” she said.

Economists say it’s important for the Federal Reserve to see inflation come down. But that’s just one report, and the Fed will also review the next August jobs report and August CPI before raising interest rates again in September.

Lyngen said all of these numbers will decide whether the Fed will hike 50 basis points, as expected ahead of Friday’s jobs report, or 75 basis points, in line with increases in June and July. The economy added 528,000 jobs in July, double economists’ forecasts. One basis point is equal to 0.01 percentage point.

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