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  • Inflation could rebound later this year. And that might be a good thing.

    Inflation could rebound later this year. And that might be a good thing.

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    U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning. 

    Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years. 

    On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month. 

    “We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX. 

    If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

    U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall. 

    The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX. 

    PCE is said to be U.S. central bankers’ preferred inflation metric.

    Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden. 

    “Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden. 

    Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

    “In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

    See: Fed has ‘more work to do’ to get inflation back down, Daly says

    Also read: Worker pay at center of Fed’s inflation fight

    Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025. 

    “I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

    Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

    U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
    DJIA
    gained 0.4%, and the S&P 500
    SPX
    was unchanged. The Nasdaq Composite
    COMP
    fell 0.5%.

    Read on:

    Want companies to lower their prices? Stop buying stuff from them.

    ‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

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  • Hate to spoil the party but there’s a new risk in town — a ‘no landing’ economy

    Hate to spoil the party but there’s a new risk in town — a ‘no landing’ economy

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    For the last 18 months, all you’ve heard from the markets is that the U.S. economy is three months away from a recession. Now, the popular analysis is that that inflation is on a smooth glidepath down and the economy will never have a downturn again.

    Worries about a recession have evaporated, and all the talk is about a “soft landing,” with the Federal Reserve not having to hike interest rates more than once more, at most.

    But behind the scenes, in some economic circles, there is growing concern about another risk for the economy, dubbed a “no landing” scenario.

    What does “no landing” mean? Essentially it’s marked by economic growth that’s too strong to allow inflation to fall all the way to 2%, where the Federal Reserve aims for it to be, and therefore an economy that will need more Fed rate hikes, according to Chris Low, chief economist at FHN Financial.

    So instead of the U.S. central bank starting to cut rates early next year, there may be more rate hikes in store.

    “There is still considerable work to do before the inflation beast is fully tamed,” Low said.

    Former Fed Vice Chair Richard Clarida described the risk in crystal-clear terms. “If the Fed finds itself  in March 2024 with an unemployment rate of 4% and an inflation rate of 4% with some of that temporary good news behind them, they are in a very tough spot,” Clarida said in a recent interview with Bloomberg News.

    “It is a risk. It is not the base case. But if I was still there [at the Fed], I would be assessing it,” he added.

    So why does this matter? Why would the Fed be in such a tough spot? Two words: presidential election.

    A Fed that is dedicated to bringing inflation down might have to slam the brakes on the economy forcefully to get the job done. That gets tough during an election year, especially one that already seems poised to be filled with acrimony.

    “The Fed does not play politics with monetary policy. The FOMC will do what is right for the economy, election year or not. Nevertheless, FOMC participants are already sensitive to triggering a recession. Doing it in an overt way when Congress, a third of the Senate, and the White House are up for grabs would be reckless,” Low said.

    Andrew Levin, professor of economics at Dartmouth College and a former top Fed staffer, said “raising interest rates sharply in the midst of an election cycle could be a delicate matter. Even the vaunted inflation fighter, Paul Volcker [the Fed’s chairman from 1979 to 1987], decided to ease off the brakes midway through the 1980 presidential campaign.”

    Ray Fair, a Yale economics professor, thinks that, whether or not the Fed successfully lowers consumer-price inflation to the vicinity of 2% will be what really matters for the 2024 presidential election. If inflation does not go gently and the Fed is still fighting next year, it would likely be negative for President Joe Biden and the Democratic Party, he said.

    See: Inflation could rebound later this year. And that might be a good thing.

    To avoid hiking rates next year, the Fed, in Low’s view, will raise interest rates to 6% by the end of this year. That is an out-of-consensus call. Financial markets think the Fed is done hiking with its benchmark policy interest rate in a range of 5.25% to 5.5%.

    Many economist and the financial markets are talking more about prospective Fed rate cuts in early 2024 than any more hikes.

    Asked during a recent radio interview if he thought a “no landing” scenario was taking shape, Philadelphia Fed President Patrick Harker replied: “I don’t think so.”

    Harker said the economy was likely on track to return to the low-interest-rate and low-inflation environment of 2012-19.

    “I think about this a lot, and I asked myself what’s different fundamentally about the U.S. economy now then the way it was before the pandemic,” Harker said. He concluded that there wasn’t much difference.

    The big trend Harker mentioned was demographics, with baby boomers still moving in large numbers into retirement. “I don’t think we have to stay in a high-inflation regime. I think we can get back to where we were,” he said.

    Steve Blitz, chief U.S. economist at research firm GlobalData.TSLombard, said he puts the probability of a “no landing” scenario at about 35%.

    Blitz added it was a common mistake for economists, policy makers, traders and journalists “to presume that the expansion to come is going to look like the expansion that was.”

    “At least in the United States, that was never the case,” he added.

    Blitz said that if the U.S. economy were growing at a rate below 2% with an inflation rate higher than 3%, the Fed would have to raise the policy rate to about 6.5%. But if the economy is humming along with 3% growth and inflation over 3%, that would be a trickier spot. “Does the Fed really want to slow that down?” he asked.

    See: The U.S. economy is aiming for a three-peat: 2% GDP growth

    The range of possible outcomes for the economy remains wide. Some economists still believe that a recession early next is the most likely outcome.

    Other economists, like Michelle Meyer, chief U.S. economist at Mastercard, think the economy will continue to grow, with inflation coming down. Meyer described that outcome as “a soft landing with bumps.”

    Stephen Stanley, chief economist at Santander U.S., said he thinks the U.S. economy will “muddle through” next year with subpar growth in the range of 1% for several quarters and inflation slowing gradually.

    “Obviously, that optimism melts away if we’re back to readings of 0.4% and 0.5% on core CPI in three months or six months,” Stanley said.

    Economic calendar: See what’s on the U.S. economic-data docket in the coming week

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  • Inflation could rebound later this year. And that might be a good thing.

    Inflation could rebound later this year. And that might be a good thing.

    [ad_1]

    U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning. 

    Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years. 

    On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month. 

    “We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX. 

    If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

    U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall. 

    The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX. 

    PCE is said to be U.S. central bankers’ preferred inflation metric.

    Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden. 

    “Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden. 

    Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

    “In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

    See: Fed has ‘more work to do’ to get inflation back down, Daly says

    Also read: Worker pay at center of Fed’s inflation fight

    Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025. 

    “I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

    Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

    U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
    DJIA
    gained 0.4%, and the S&P 500
    SPX
    was unchanged. The Nasdaq Composite
    COMP
    fell 0.5%.

    Read on:

    Want companies to lower their prices? Stop buying stuff from them.

    ‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

    [ad_2]

    Source link

  • Consumers seeing substantial improvement in U.S. economy over past 3 months: University of Michigan survey

    Consumers seeing substantial improvement in U.S. economy over past 3 months: University of Michigan survey

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    The numbers: The University of Michigan’s gauge of consumer sentiment inched down to a preliminary August reading of 71.2 after hitting a 22-month high of 71.6 in the prior month.

    Economists polled by the Wall Street Journal had expected sentiment to inch up to a 71.7 reading in August.

    Another key part of the report is the U. of M. measure of inflation expectations.

    According to the report, Americans’ expectations for overall inflation over the next year slipped to 3.3% in August from 3.4% in the prior month, while expectations for inflation over the next 5 years inched down to 2.9% from 3%.

    Key details: According to the Michigan report, a gauge of U.S. consumers’ views on current conditions rose to to 77.4 in August from 76.6 in the prior month, while a barometer of their future expectations fell to 67.3 from 68.3.

    Big picture: Sentiment has been boosted by waning recession fears and disinflation in grocery store prices.

    What the University of Michigan said: “Consumer sentiment was essentially unchanged from July, with small offsetting increases and decreases within the index.  In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago,” said Joanne Hsu, the director of University of Michigan consumer surveys.

    Market reaction: Stocks
    DJIA

    SPX
    were mixed in early trading Friday while the yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    rose to 4.12%, the highest level since the spike last week after Fitch Ratings downgraded the U.S. credit rating.

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  • U.S. wholesale prices surprise to the upside in July, PPI shows

    U.S. wholesale prices surprise to the upside in July, PPI shows

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    The numbers: The U.S. producer price index rose 0.3% in July, the Labor Department said Friday, up from a revised flat reading in June and the largest gain since January.

    Economists polled by The Wall Street Journal had forecast a 0.2% advance.

    The core producer price index, which excludes volatile food, energy prices, and trade services rose 0.2 in July, up from a 0.1% gain in the prior month. This is the largest increase since February.

    Key details: Over the past year, headline producer price inflation was running at a 0.8% rate in July, up from 0.2% in the prior month.

    Core prices are up 2.7% from a year earlier, matching the gain in June. Core PPI prices were running at a 5.8% rate in July 2022.

    A big part of the increase in producer prices was in the services sector.

    The cost of services rose 0.5% last month, up from a 0.1% drop in June. This is the largest increase in a year. The increase was led by a 7.6% gain for portfolio management.

    The cost of goods rose 0.1% in July after a flat reading in the prior month.

    Energy prices were flat in July, down sharply from a 0.7% gain in the prior month.

    Wholesale food prices jumped 0.5% after a 0.2% fall in the prior month.

    Further back on the production line, prices for intermediate goods fell 0.6%, the sixth straight monthly decline.

    Big picture: Price pressures have been diminishing at the producer level much faster than at the consumer level. Economists are watching the inflation data closely to see if the July interest rate hike by the Federal Reserve was the last hike of the cycle.

    What are they saying? “In short, PPI surprised to the upside in July. While we do not expect further rate hikes this year, if inflation surprises to the upside and the labor market and growth do not slow, another increase in interest rates cannot be ruled out in 2023,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

    Market reaction: U.S. stocks
    DJIA

    SPX
    were set to open lower on Friday after the stronger-than-expected PPI data. The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    rose to 4.12%.

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  • U.S. April producer prices rise 2.3% over past year, smallest increase since January 2021

    U.S. April producer prices rise 2.3% over past year, smallest increase since January 2021

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    The numbers: U.S. producer prices rose 0.2% in April, the Labor Department said Thursday.

    Economists polled by the Wall Street Journal had forecast the PPI would rise 0.3%.

    In the 12 months through April, the PPI increased 2.3%. It follows a 2.7% gain in March. This is the lowest rate since January 2021.

    Key…

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  • U.S. wholesale price inflation picks up in November, but is lower for year

    U.S. wholesale price inflation picks up in November, but is lower for year

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    The number: U.S. wholesale prices rose 0.3% in November, the Labor Department said Friday.

    Economists polled by The Wall Street Journal has forecast a 0.2% gain.

    This is the third straight 0.3% monthly gain in the PPI index. Inflation in October and September was also revised up from the prior estimate of a 0.2% gain.

    The core producer price index, which excludes volatile food, energy and trade prices, also rose 0.3% in November, up from a 0.2% gain in the prior month.

    The increase in producer prices over the past 12 months slowed to 7.4% gain from 8.1% in the prior month. This is down from the peak of 11.7% in March.

    Over the past year, core prices rose 4.9%, down from 5.4% in October.

    Key details: The cost of energy fell 3.3% in November after a 2.3% gain in the prior month.

    Food prices jumped 3.3% after a 0.8% increase in the prior month.

    The cost of trade services jumped 0.7% in November after two straight monthly declines.

    Big picture: Although hotter than expected in November, inflation at the wholesale level is showing steady deceleration from the peak in March.

    The market is more focused on consumer price inflation report, which will be released next Tuesday, one day before the Fed’s decision on interest rates.

    Market reaction: Stock futures
    DJIA,
    -0.25%
    turned lower on the upside surprise to the monthly gain. The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.533%
    jumped to 3.5%.

     

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