“Don’t be fooled” by rising inflation, says the economist. Prices are falling, and the Fed now has the ammunition to pause rate hikes

"Don't be fooled" by rising inflation, says the economist.  Prices are falling, and the Fed now has the ammunition to pause rate hikes

The latest inflation data can be a bit misleading to the untrained eye. “Don’t be fooled by this uptick,” said Julia Pollack, chief economist at ZipRecruiter. “Inflation is slowing, and doing so across a broader range of goods and services.”

Core inflation rose from 3% in June to 3.2% last month, according to the Bureau of Labor Statistics (BLS). mentioned Thursday. But the rise was partly due to changing year-on-year comparisons, and the monthly data showed that inflationary pressures were stabilizing.

Pollack noted that if you estimate the latest inflation data on a year-over-year basis rather than compare it to last year, when inflation hit a four-decade high, it looks a lot less dire. It indicated that inflation in July was 2.52% on an annual basis for six months and only 1.89% on an annual basis for three months. That’s right around the Fed’s target rate of 2%.

This view was supported by Rick Ryder, BlackRock’s CIO of Global Fixed Income and President Black stone Global customization investment team.

“Today’s CPI data showed a continued decline from the high levels of inflation seen over the past two years,” he said, adding that “it is not only encouraging that today’s report was softer, but also that the three: and six-month trends for these indicators Inflation is decisively low.”

Core inflation — which excludes more volatile food and energy prices and is often seen as a stronger predictor of real core inflation — rose just 0.2% for the second consecutive month in July, marking the gauge’s smallest consecutive gain in more than two years. Core inflation year-over-year remained elevated at 4.7%, again partly due to core effects, but the trend there was also “encouraging,” Pollack said.

“Wage growth continues to outpace inflation,” she added. “As workers see their purchasing power improve, expect to see continued growth in consumer spending and continued resilience of the labor market.”

For BlackRock’s Reeder, the current inflationary trend should be “encouraging to consumers, as well as to federal policymakers.” Federal Reserve officials have raised interest rates to the highest level in 22 years in their attempt to crush inflation since March last year, sending a flood of recession forecast from Wall Street. But with underlying inflationary pressures fading, Chairman Jerome Powell and company may be nearing the end of a painful rate hike.

“We remember the rate hikes last year as they were yesterday, so the Fed won’t cut rates for a while, but hopefully the central bank will hang around for an extended period of time, before they probably start cutting rates later in 2024. , where today’s high prices only become stable over the coming months and quarters,” Reeder said.

Boost for soft landing listing

Pollack and Rieder aren’t the only ones who saw the bright side of the latest inflation report. Investors celebrated the data Thursday, with the S&P 500 up 0.6% by midday. and Charlie Ripley, chief investment analyst at Allianz The investment management argued that the inflation data showed the “soft landing story” — the idea that inflation can vanish without the Fed needing to trigger a job-killing recession — was still gaining traction.

Several price categories that worried economists and the Fed continued to fall in July, including airfare, which sank for the fourth straight month, this time down 8.1% month over month, and used cars and trucks, which fell 5.6% for the year. the past. .

“The Fed would certainly welcome a building trend in inflation as they prepare to make a policy decision at the September meeting,” said Ripley, noting that “the case continues to build” for the end of the rate hike cycle.

Georges Mathieu, chief information officer at Key Private Bank, which manages $50.2 billion, said the July CPI data was “reminiscent of the good old days” before the pandemic, when inflation was far from an issue.

He noted, “In 2019, the average monthly increase in inflation was 0.2%, and this is what we witnessed in the past two months in 2023.” “Thus, the Fed may feel as though it has ‘stopped the landing’ and can pause as planned and not raise interest rates in September.”

“reasons for caution” amid the recent stand on inflation

While there were a number of positive signs in the latest CPI data, some economists remain concerned that inflation may become “flat”.

Brian Coulton, chief economist at Fitch Ratings, said that while a slowdown in core inflation is clearly “good news,” the CPI report was not entirely positive.

He warned that “a rise in basic services inflation to 0.4% per month from 0.3% in June will be seen by the Fed as cause for caution.” “Rents don’t seem to be slowing much at all on a monthly basis, and given the weight of shelter at 34% in the CPI, that’s significant.”

By Colton’s point, the shelter index accounted for more than 90% of the increase in inflation last month, according to the BLS. their rental prices I continued Over the course of the year, even with the average selling price of American homes dropped for the second consecutive quarter over the summer.

John Lear, chief economist at Morning Consult, said shelter inflation could accelerate by the end of the year. He warned that housing demand remains “elastic” as Chronic undersupply of homes in the United States are surviving the cooling effect of rising rents and mortgage rates.

“While the core CPI shows signs of slowing trend growth, future progress in fighting inflation will be harder, not easier,” he said. “The longer inflation stays high, the more entrenched it becomes. The question we should all be asking is how long the Fed is willing to accept core inflation above 4%. My sense is that their tolerance is very low, which means we shouldn’t expect rate cuts this year “.

This story originally appeared on Fortune.com

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