People shop at a supermarket as inflation affects consumer prices in New York City on June 10, 2022.
Andrew Kelly | Reuters
Finally, inflation may be cooling, thanks to falling gas prices and supply chain issues.
Economists expect the July consumer price index rose 0.2%, down from June’s 1.3%, according to Dow Jones. Year-on-year, the pace of consumer inflation is expected to ease in July to 8.7%, down from 9.1% in June.
The CPI is reported 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 how aggressive the Federal Reserve might be in raising interest rates to combat rising prices.
“Right now you’ve got about four drivers of inflation. You’ve got commodity prices. That’s going to go away. You’ve got supply chain issues. That’s going to go away, but you’re still left with housing and the labor market, and that’s going to show in inflation of services,” said Aneta Markowska, chief economist at Jefferies. “You still have a problem with services inflation, and that’s driven by housing and labor shortages. That’s not going away anytime soon, until the Fed manages to destroy demand and that hasn’t happened.”
Excluding energy and food, the CPI is expected to rise 0.5% in July due to higher prices for rents and services, but this is down from 0.7% in june Core CPI is expected to be higher than in June year-on-year, gaining 6.1% from 5.9% in June.
“Everybody is prepared 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 unusually bad news,” said Mark Zandi, chief economist at Moody’s Analytics.
Zandi said he expects headline inflation to rise just 0.1%. “That would put it at 8.7% year-on-year, uncomfortably high, painful, but moving in the right direction. I think the 9.1% inflation rate we experienced in June will be the peak… a lot of that depends of oil. prices,” he said.
Inflation expectations fall
The report comes as both consumer and market inflation expectations are falling. A New York Federal Reserve survey this week showed consumers expected inflation to run at a 6.2 percent pace over the next year and an annual rate of 3.2 percent over the next three years. That’s a big drop from the corresponding results of 6.8% and 3.6% in a June survey.
“That’s one of the more positive aspects of the inflation situation: inflation expectations have come in. Consumer expectations have come in, not surprisingly with lower gas prices,” Zandi said. “But more importantly, bond market expectations have come back in. … They’re back within striking distance of the Fed’s target. That’s a very good sign.”
Bond market metrics for inflation, such as the 10-year balance, show investors are seeing a slower pace of inflation than just a couple of months ago. According to Ian Lyngen, head of US rate strategy at BMO Capital Markets, the 10-year bond is now at 2.50%, down from a peak of 3.07% earlier this year.
This means that market participants now expect an inflation rate averaging 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 too many wild cards for us to have a particularly strong view, other than to say that this is consistent with peak inflation and will be traded as such,” he said.
Oil is the wild card
A wild card is oil, and while it has fallen recently, market opinions diverge on what will happen later this year. The price is highly dependent on geopolitical events and the slowdown in the global economy. August has seen some of the lowest oil prices since Russia’s invasion of Ukraine, with West Texas Intermediate crude futures trading around $90 on Tuesday, well below March’s close to $130 dollars per barrel.
In June, the CPI energy index increased by 7.5%, and gasoline alone rose by 11.2%.
Gasoline prices fell for the month of July, down 20% from a June 14 high of $5.01 a gallon. The national average price for a gallon of unleaded was $4.03 per gallon on Tuesday, according to AAA.
Housing costs are expected to have continued to rise in July. In June, the rent index rose 0.8%, the biggest monthly increase since April 1986.
“That’s not coming. That’s going to stay consistently high, at least through next year. We could see the worst acceleration in housing costs at the end of the year,” Zandi said.
Zandi said the dual improvement in supply and cooling demand means rents could moderate.
“One reason is because demand is hurt. People can’t afford these rents … and the other is supply. Multifamily construction is strong,” the economist said.
“That will appear in the housing CPI, but it won’t be until next year,” he said. “That’s going to add about half a point to inflation going forward for the foreseeable future. We’ve got 2.5% CPI inflation, in the spring of 2024. But half a point of that is housing.”
Markowska said consumers got a break in July travel costs, which have fallen from the higher pace of the spring and summer. In July, it expects the CPI Airfare Index to decline 7.7% month-on-month, taking 0.1% from the core CPI.
So far, Markowska said car prices don’t appear to be coming down. “It looks like we 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 post another increase this month and new car prices will go up, too.” he said. He added that prices appear to be stabilizing. “I think a lot of people expected that we would reverse some of the price gains.”
He said supply chain issues have eased. “You see it clearly in many indicators: ISM indices, prices paid are decreasing, delivery times are shortening. Pacific traffic is below the levels we saw last year. In fact, we are also in a peak shipping period. Everything seems to be moving in the right direction,” he said.
Economists say it’s important for the Federal Reserve to see inflation decrease. But this is just one report, and the Fed will also look at the upcoming August jobs report and the August CPI before raising interest rates again in September.
Lyngen said all those numbers will decide whether the Fed raises by 50 basis points, as had been expected before Friday’s strong jobs report, or 75 basis points, in line with hikes in June and July. The economy added 528,000 jobs in July, double what economists had forecast. One basis point is equal to 0.01 of a percentage point.