The Bureau of Labor Statistics for the USA has just published the monthly inflation numbers of the outgoing month of July. According to the report, the US CPI (Consumer Price Index) for the month of July had risen slightly, for the first time after a year of continuous decline.
However, the US CPI which excludes some volatile food and energy products from its basket has shown the slightest increase in nearly two years, which shows that the interest rate hikes from the Federal Reserve has been working, and has been able to pace out the increase in prices.
The Government reported on Thursday, that the inflation in the US has been reported at 3.2% in July, slightly above than 3% reported back in June, which was the lowest rate achieved in two years. This means that the consumer prices have increased almost 3.2% from a year earlier.
Though, the numbers seem fantastic compared to last year’s peak of 9.1%, during the global super commodity cycle, and the Russia-Ukraine war that erupted last year. It still has been far higher than FED’s target of 2%.
Core Inflation (CPI) is an important indicator in the economy, as FED, economists, investors, and businesses view it as a factor that shows where the price pressures might be headed in the near future and take their decisions on that. From June to July, inflation remained sluggish and increased just by 2%, thanks to relieving pressure on groceries, electronics, and used cars.
Similarly, the inflation data is also important for the central bank and monetary policy as CPI is a key barometer that the central bank uses to decide whether to continue raising interest rates or not. In order to control inflation, the Fed has increased its rates 11 times since March 2022 to a two-decade high.
Rubella Farooqi, chief economist for High Frequency Economics, an American economic research consultancy, said that “the core prices are moving in the right direction, and that will be welcome news to the Fed’s policymakers”.
Overall prices increased 0.2% month on month, from June to July, though 90% of the increase is attributed to the rising housing costs. Food prices that have constrained the American household budget for almost 24 months rose mildly by 0.2%, even though the prices of eggs, dairy products, meat, and beer declined, but the overall food prices are still up by 4.9% from a year earlier. July saw a decline in the prices of pet food, audio equipment, and TVs.
Furthermore, energy prices increased by just 0.1% but were offset by falling electricity costs. Used vehicle prices were seen falling for a second consecutive month, which dipped 1.3% month-on-month and 5.6% annually. Last year, the vehicle prices had surged to the roof after a computer chip shortage forced the halting of production, and saw an increased influx of buyers into the used car market. Now, the chip shortage has been resolved, easing out the situation, thus reducing the demand and prices of used cars.
Some economists prefer looking at the past 3 months data, rather than relying on just one month data, as it is less volatile and captures the inflation data more accurately. According to that, the consumer prices remained at 1.9% annualized from May to July.
Economists are saying that easy progress has likely been achieved amid a fed’s resolve to counter the inflation, which has been observed in the declining price of petrol that has already declined by $5/gallon from the previous year.
Background and the future course of action
The inflationary pressure was observed across the globe beginning in 2021 caused by the clogging of global supply chains, first due to the constant lockdown situation and the overwhelming global supply lines after the reopening of industries across the countries that led to increased demand of shipping thus resulting in delays. Russia-Ukraine conflict has also added up to the matter and has resulted in the increased prices of grocery items and petroleum products. But the problem has eased out and the prices of manufactured goods actually dipped in June.
Now, the US has to divert its attention towards the inflationary pressures in the services industry, like hotels, restaurants and other entertainment venues, where wages contribute a substantial share in the costs of business. And workers shortage after the lockdowns and work for home scheme has led to increased wages in these industries.
For example, the Labor department reported last week that average hourly wages rose by 4.4% in the month of July compared to last year. To cover these increasing wage costs, companies have increased their prices which contributes to shooting up inflation.
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Despite the concerns about high wages costs in the services sector, one of the crucial and closely watched indicators of wages and salaries – the Labor Department’s employment cost index – grew at a decreasing rate from April to June this year. Besides the government jobs, the pay rose by 1%, slightly below the 1.2% increase seen in the first three months. Compared with the previous year, it grew by 4.6%, significantly lower than the first quarter’s increase of 5.1%.
Still, many American households are feeling the mounting pressure of inflation and high prices, because there are some things that you can sacrifice, but sometimes there are things that we can’t reduce their consumption, let alone excluding them from the list.
In the coming weeks, Fed officials and policymakers will have tons of data to absorb before deciding to continue increasing rates or to reverse the trend. This report is the first of the two CPI numbers that the officials will consider before their scheduled meeting on 19 – 20th September. Moreover, their preferred inflation gauge, the personal income expenditure price index and jobs statistics will be released on August 31st and September 1st, respectively.
The weakening pace of inflation, together with a resilient job market might lead to a “soft landing”. As per Sal Guatieri, a senior economist at BMO Capital Markets “barring a hot August CPI and labor market report, the progress should encourage the Fed to skip a rate hike on Sept. 20 and, in our view, for the remainder of this exceptional tightening cycle, that can only increase the prospect for a soft landing.”
Many economists in the market are also buying this forecast, that the latest hike in July will most probably be the last by Fed, which is evident from the fact that nearly 90% of the traders in the market are not expecting any hike by Fed, according to the CME Group’s FedWatch Tool.
