Following today’s announcement that the US Consumer Price Index climbed 8.5% in the year to July, compared with 9.1% in June, investment experts share their views with Wealth DFM magazine on what this might mean for the US economy.
Tiffany Wilding, North American Economist, and Allison Boxer, Economist at PIMCO:
“Bottom Line: As expected, both headline and core inflation moderated in July (both were below consensus, but in line with our forecast). However, the details of the report were firmer than implied by headline miss vs consensus. Assuming global food and energy commodity prices maintain their recent easing, June likely marks the peak in the year-over-year rate of headline inflation. However, the year-over-year rate of core will likely reaccelerate in August, and isn’t likely to peak until September. The categories that drove the July weakness in core – airfares and hotels – tend to be more volatile, whereas the stickier components (rents/Owners-Equivalent-Rent) remained firm. Today’s print didn’t change our forecast for core inflation of 5.5% and 3.5% year-over-year, for 2022 and 2023, respectively, nor did it change our near-term outlook for the Fed.
“Regarding the Fed, this report will no doubt be a welcome relief, but we still assign a relatively high probability to them hiking another 75 basis points in September. Short-term inflation expectations have been moderating along with food and energy prices. However, despite today’s print, we still think Fed officials will be concerned about the underlying “trend” in inflation, which appears to have once again shifted higher. Core measures of inflation (e.g., Cleveland Fed trimmed mean, the New York Fed underlying inflation gauge, Atlanta Fed sticky price measure), which are better predictors of future inflation, have all accelerated, with the depth and breadth of inflationary pressures across items in the consumer price basket accelerating. More concerning, the dynamics of wage inflation aren’t much different. Wage inflation has also broadened from the low-wage, low-skill services sectors to a range of industries, occupations, and skill levels. The Atlanta Fed wage tracker, which doesn’t suffer from distortions due to compositional shifts, has increased rapidly – behavior that resembles a non-linear Phillips curve, and/or accelerating inflation expectations. Furthermore, this has happened despite a productivity recession, implying unit labor costs have substantially increased – something corporations will want to offset by rising prices to maintain margins. Unit labor cost inflation appears to be growing at 7% on an annual average basis, which has historically implied core CPI inflation of closer to 4%.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“The latest US inflation print is good news for both consumers and markets as for the first time in a while the number came in lower than expected on the month. Investors will be hoping that this is the beginning of the end for this inflationary period and that it is the start of a downward trend in CPI. It may be too early to declare victory yet as much of it will depend on the outlook for energy costs, but this is very much a step in the right direction.
“Still, the Federal Reserve will be cheered by the news, especially the fact that core inflation was also lower than expected. The Fed will still need to hike rates at their next meeting in September but this reduces the risk of another 75bps move and going forward we might just see markets act a little calmer than they have to date.”
Michael Metcalfe, Head of Macro Strategy, State Street Global Markets :
“July’s inflation print will be more comforting for the Fed, especially the lower than expected rise in core inflation. This was partly reliant on an outsized fall in airfares and the trend in housing related and medical care inflation is still troubling. Nevertheless, this was a big improvement on June’s data and if repeated in August would take some pressure of the Fed’s September FOMC meeting.”
Seema Shah, Chief Global Strategist at Principal Global Investors: “Clearly, today’s CPI number is an all-out positive and markets will be rejoicing the fact that both headline and core CPI came in lower than expected. With last week’s jobs report showing a still-very strong labour market, it seems like the US economy may have reached a goldilocks state. However, this period will likely be short-lived. Within a month or two, there will be clearer evidence that inflation has peaked, but also evidence that the decline is painfully slow. Households will unfortunately continue to feel the severe strain of elevated price pressures on their budgets, while wage growth persistence will take its toll on corporate profit margins.
“The Fed will be looking at today’s number with a sigh of relief. But it is not enough to convince them to take their foot off the brakes. The Fed still has significantly further to tighten and the US economy ultimately cannot avoid its fate. Enjoy today and the next few weeks, it won’t last for too long.”