Data released by the Labor Department suggests that U.S. inflation has significantly slowed down in recent months. However, some analysts are warning that there are potential risks of re-acceleration in the fourth quarter or next year.
In July, U.S. consumer prices rose by a modest 0.2%. The yearly rate of inflation also increased from 3% to 3.2%, marking the first increase in 13 months. On the other hand, the core rate of inflation, which excludes food and energy prices, experienced a slowdown in its yearly increase to 4.7%, the slowest rate in nearly two years.
The U.S. producer price index for July showed a rise of 0.3%, compared to a revised flat reading the previous month. Additionally, the core producer price index saw a gain of 0.2% in July, up from 0.1% in June.
Kathryn Rooney Vera, the chief market analyst at StoneX, cautions that there could be a reacceleration of inflation next year due to base effects potentially working against inflation numbers.
It is important to note that even a small monthly increase in Consumer Price Index (CPI) or Producer Price Index (PPI) data during the same period in the previous year can lead to a high inflation rate in the current year, and vice versa.
The first half of 2022 saw a significant acceleration in U.S. inflation, which later slowed down in the second half. In June 2022, the yearly CPI inflation rate reached its peak at 9.1% before experiencing a decline.
According to Rooney Vera, the most challenging part in combating inflation was not reducing the yearly CPI inflation rate from 9% to 3%, but rather lowering the yearly inflation rate for core personal consumption expenditures (core PCE) from 4.1% to 2% in June.
Julian Brigden, co-founder and president at Macro Intelligence 2 Partners, shares the same viewpoint, disagreeing with the notion that inflation has been defeated. Brigden highlights the risks of potential upside surprises in inflation during the fourth quarter.
As Bridgden suggests, the effects of falling goods inflation, food inflation, and energy inflation are expected to start dwindling in the near future.
Resilient U.S. Economy to Grow in Third Quarter
The U.S. economy remains resilient with relatively low unemployment numbers, fueling an elevated rate of inflation in the service sector. The Federal Reserve Bank of Atlanta predicts that the U.S. economy will grow by 4.1% in the third quarter.
Inflation Dilemma for the Fed
Rooney Vera questions how service sector inflation can be expected to drop in an economy primarily driven by consumption and positive real wages, with unemployment at 3.5% and the potential for 4% growth in the third quarter. This leaves the Federal Reserve facing a difficult choice; should they target 2% inflation or not?
Inflation’s Impact on the Economy
Melissa Brown, global head of applied research at Qontigo, believes it would be beneficial to see some inflation considering the positive economic and employment numbers. However, a significant decrease in inflation could suggest an impending recession.
Earlier this year, elevated inflation put pressure on companies to raise their prices to offset increased costs, especially in light of interest rate hikes by the Fed. Nevertheless, if inflation were to rise in the fourth quarter, it could indicate a strong enough economy to sustain higher inflation levels.
Mixed Trading for U.S. Stock Indexes
On Friday, U.S. stock indexes experienced mixed trading. The Dow Jones Industrial Average (DJIA) gained 0.4%, while the S&P 500 (SPX) remained unchanged. In contrast, the Nasdaq Composite (COMP) fell by 0.5%.
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