When Federal Reserve Chair Jerome Powell said that the annual inflation rate wouldn’t reach the central bank’s aim of 2% for a few more years, several market observers were perplexed. Why? Because after reaching its 9.1% peak in June 2022, the consumer price index (CPI) had been slowing for a continuous 12 months. This triumph was won through Bidenomics! Wait a minute. Should the US economy prepare for resurrected across-the-board price pressures in light of the most recent CPI data showing a rise for the first time in a year?
The July Inflation Report
The annual inflation rate increased to 3.2% in July, up from 3% in June, and was somewhat lower than the consensus expectation of 3.3%, according to the Bureau of Labor Statistics (BLS). The core CPI, which excludes the erratic food and energy prices, fell to 4.7% from 4.8%, falling short of the market expectation of 4.8%. Both CPIs increased 0.2% from one month to the next. Here is a comparison of the CPI categories from the previous month:
- Food: +0.2%
- Energy: +0.1%
- New Vehicles: -0.1%
- Used Cars and Trucks: -1.3%
- Apparel: 0%
- Medical Care Commodities: +0.5%
- Shelter: +0.4%
- Transportation Services: +0.3%
- Medical Care Services: -0.4%
The facts underneath the surface may cause annoyance, even when the headline figures may not be enough to cause economic fury. For instance, traditional household essentials like bread, rice, meat and veal, oranges, coffee, and butter all saw significant increases between June and July. Or on the energy front, natural gas services rose 2%, fuel oil increased by 3%, and gasoline increased by 0.2%.
Crude oil might be crucial to the short-term inflation trajectory. West Texas Intermediate (WTI) prices have rebounded to as high as $84 a barrel on the New York Mercantile Exchange since falling to $67 at the end of June, a new 2023 high. This has made paying for gas more painful; the national average price for a gallon of gasoline is now $3.83, up 20% from the same time last year.
The Eccles Building closely monitors services inflation, which makes up about half of the monthly CPI report and fell to an annualized rate of 5.7% in July from 5.74% in June. The reading was the lowest in over a year.
As the index increased by 0.4% in July, housing costs remained stubbornly high. The category’s principal residence rent, which climbed by 0.4%, is now 8% higher than last year. Noting that shelter is a lagging signal, the chattering elite, including Chair Jerome Powell, has been claiming that rents are declining for almost a year. However, tenants have not yet witnessed the fulfillment of this anticipation.
The Federal Reserve Bank of Cleveland’s Inflation Nowcasting model predicts that the year-over-year inflation rate may once again reach the 4% threshold for the August CPI.
The BLS inflation data did, in fact, elicit varied responses.
According to the White House, the most recent CPI numbers demonstrate a robust economy. “Today’s figures reflect that our economy is still robust. Since last summer, annual inflation has decreased by about two thirds, and working people this year are seeing increases in real wages. We managed to accomplish this while maintaining solid economic growth and nearly record-low unemployment. That is Bidenomics, according to a statement from the government.
The news reportedly caused the US financial markets to yawn. The Nasdaq Composite Index and the Dow Jones Industrial Average first spiked in response to the inflation numbers that were weaker than anticipated. However, they ultimately closed the trading session on August 10 with little change. Traders were analyzing the potential effects of the July CPI report on the Federal Reserve’s decision to set policy rates for September. Following the inflation figures, central bank officials noted that there is still work to be done.
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The truth? Inflation may continue for many years to come and may even be above trend. Market implied inflation forecasts for the next 10 years have risen to the highest levels in more than a year, which tends to support investors’ beliefs. To put it another way, it could be time to get ready for an environment marked by high inflation and high interest rates. It’s time to party as if it’s still the 1990s.