A closer look at this week’s inflation numbers

Global inflation rate 2022 has stock market problems and assets are at risk of stock market crash

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Last week’s inflation data – the consumer price index and producer price index for July – started to show some relief in rising prices, but the US economy is still a long way from meeting its target. the Federal Reserve’s 2% inflation target.

In short, consumer prices flat from june to july and Producer price index in July unexpectedly fell 0.5% from June, compared to +0.3%. On a Y/Y basis, CPI rose 8.5% from 9.1% a month earlier and PPI fell to 9.8% from 11.3%.

Much of the relief was due to falling gasoline prices. The bad news is that “tougher” prices such as the cost of shelters continue to rise.

“So this 0% monthly gain is better than what we’re seeing, but there’s still a lot of underlying trend and inflation worth it,” said Robert Frick, corporate economist at Navy Federal Credit Union. concerns,” Robert Frick, corporate economist at Navy Federal Credit Union, said in an interview. with Alpha Search.

“One of the more troubling things that I don’t think has been analyzed enough is the cost of food,” he said. Global upward pressure on cereal prices is driving up the prices of baked goods. Avian flu has decimated chicken flocks, and chicken flocks in the US are very low. “So you’re going to see a lot of food cost issues,” traditionally quite flexible — “but not this time.”

accommodation expenses, too, no sign of censorship. “There are not enough units, rental or housing, in the country and the rents,” said Frick.

Ryan Sweet, senior director at Moody’s Analytics, said peaking rental inflation “could be the peak later this year.” To offset that, prices for goods, clothing, electronics, new and used car prices – “they need to start falling to offset that rental inflation.”

The good news is that there is a “fairly strong pipeline” of multifamily apartments, i.e. apartments, in the works. “So eventually there will be an increase in supply, which will put some downward pressure on rents for about 12-18 months. But the coming months will be quite difficult,” Sweet said.

Frick said the curbing of inflation in July was due to global, not domestic, factors, mainly due to falling energy prices. The global components account for about three percentage points of the 8.5%-9% CPI ratio, he said. So if those pressures ease, inflation could drop to 5% or 6%.

While stock markets welcomed Wednesday’s lower-than-expected CPI report – the S&P 500 rose 2.1%, starting a four-session losing streak – the Federal Reserve is expected to soon halt interest rate hikes.

There are no celebrations yet: Moody’s Sweet said: “From the Fed’s point of view, they haven’t opened the champagne yet.” “Inflation is still very, very high.” However, neither Frick nor Sweet see a recession imminent.

“So a recession is going to happen at some point, but I don’t think it’s going to happen this year or early next year,” Sweet said. An inverted yield curve signals a downturn in the next 12 to 15 months. “But outside of the yield curve, the economy is fine,” he said.

“Recessions are inevitable,” Frick said. And with this tightening cycle, “soft landing will be a miracle.” A best-case scenario is that inflation will reduce on its own, leading to a mild recession with minimal job losses. He sets a 20%-30% probability of a recession next year, but then “there is an extremely high probability of a recession in 2024.”

Strong job prospects: While there are worries about the labor market, the unemployment rate remained very low at 3.5% in July. “Job growth is very strong, so as long as the job market holds up, we should be able to weather the recession,” Sweet said.

He expects the Fed to raise the benchmark rate by 50 basis points in September, shortening the 75bp hike back to June and July. He then sees a 25bp increase per meeting. until the federal funds rate reaches 3.5%. “And that’s when I think the Fed is going to pause,” Sweet said. “They take a deep breath, look around, make sure they’re not breaking anything in the economy.”

What is the next economic report to be considered? The two economists will be looking at July’s personal consumption spending numbers, due for release on August 26. Sweet expects core PCE to grow 1/10 from the previous month. , slower than 0.6% million increase in June. That would take Y/Y growth to 4.6%-4.7%, compared with a 4.8% gain in June.

Some housing reports also released this week. The August NAHB Home Building Sentiment Index, consensus is flat M/M, comes out on Monday and July housing starts and permits (consensus is both will slide) come out on Wednesday Three. Existing home sales for July (also expected to decline) will be published on Tuesday.

While Frick sees some cracks in the housing market, with house price gains slowing, “the overarching macro factor is large demand and too few units would call an adjustment for shelter-in-place inflation.” some time to come.”

SA Contributor John M. Mason advises looking at what are financial markets tell us and not just listen to Fed officials.

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