Analysis: Will the United States usher in another wave of inflation?

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A woman buys groceries at a supermarket

After the release of the new inflation data, two questions were asked to the US financial market:

First, is inflation starting to return?

Second, how will recent data affect the Fed's monetary policy decisions?

In July, annual inflation edged up to 3.2%, the first increase in a year. The core consumer price index (CPI), which excludes the volatile food and energy sectors, remained high at 4.7%.

Producer prices also saw a marked jump, rising to 0.8% year-on-year last month. The core producer price index (PPI) remained above expectations at 2.4%.

Inflation in the second half of the year

Despite the sharp surge in crude oil and gasoline prices, this increase was not fully reflected in the CPI report of the US Bureau of Labor Statistics (BLS).

Scott Anderson, chief economist at Bank of the West Economics, said in a note: "The July CPI report clearly ignored this surge in energy prices, and we now expect it to appear in the August CPI report, putting further upward pressure on inflation over the same period." ”

Over the past three months, West Texas Intermediate (WTI) crude has risen nearly 20 percent, exceeding $83 a barrel. According to the American Automobile Association (AAA), gasoline prices have also soared about 20 percent so far this year, peaking at $3.84 a gallon.

The Federal Reserve Bank of Philadelphia cut its inflation forecast model estimate for August. The region's central bank now expects annual inflation to be 3.8 percent, down from a previous forecast of 4.1 percent. Core CPI is expected to move as low as 4.5%.

Peter Schiff, chief global strategist at Euro Pacific Asse Management, believes that the upward trend in inflation in July is just the beginning of renewed price pressures.

He posted on social media X (formerly Twitter): "Core inflation is bottoming out and headline inflation is about to rise sharply, driven by soaring oil prices.

"The better-than-expected 0.3% increase in the PPI in July is just the beginning. In the future, even greater upside surprises are coming. Schiff explained in another X post.

In an interview with CNBC following the release of wholesale price data on August 11, Heritage Foundation economist EJ Antoni also expected inflation to continue to rise, believing that many categories in the PPI, including food and feed, energy commodities, transportation and storage, are likely to revise upwards over the next six months.

Some market experts say that the producer price index is a reliable indicator of where inflation is heading because it measures the price at which producers sell their goods. The Consumer Price Index measures the price shoppers pay for goods and services.

Ali Dhanji, a financial adviser to Raymond James, warned that PPI "is not good news for the Fed because PPI tends to be a leading indicator of consumer inflation and indicates potential inflation in the future."

"PPI rose year-on-year for the first time in 13 months." He wrote on X, "More data is needed to convince the Fed of its 2 percent (inflation) target." ”

Meanwhile, ING economists believe that the July CPI data indicates a sustained easing of inflationary pressures. At the same time, there may be discrepancies between headline and core inflation measures this fall.

James Knightley, chief international economist at ING, said: "Unfortunately, we are likely to see headline annual inflation rise further month-on-month in August, albeit modestly. This will largely reflect rising energy costs, but we suspect inflation will resume its downward trend again by October. Core inflation will not have this problem, as the 0.6% month-on-month reading for August and September last year will disappear from the yearly comparison and be replaced by the 0.2% reading we predicted, slowing annual core inflation to below 4% in September. ”

But one economist believes there will be a spike in inflation later this year.

David Payne, a full-time economist at Kiplinger, wrote: "The reported 12-month inflation rate is likely to rise slightly by a few tenths of a percentage point in the coming months, then rise sharply by the end of the fall, reaching 3.9% in December, before falling back rapidly." Reasons for the November and December inflation surge: A temporary price decline seen 12 months ago will result in a larger year-on-year inflation figure at the end of 2023. ”

Former U.S. Treasury Secretary Larry Summers warned earlier this month that inflation could return, citing rising wages.

Summers told Bloomberg on Aug. 4: "I don't think we're sure yet that inflation isn't going to really accelerate at some point in the future." This is my concern. ”

The average hourly earnings growth rate in July remained unchanged at 4.4%.

Bloomberg TV host Lisa Abramowicz said inflation expectations for the next five to ten years had climbed to their highest level in about a year.

Abramovich said on social media X: "Traders are starting to bet on a future where inflation continues to rise and long-term bond yields rise. ”

Consumers are more optimistic because their inflation expectations have been trending downward since last spring.

The University of Michigan's 1-year inflation expectations index fell to 3.3% in August from 3.4% in July. The 5-year inflation forecast also fell to 2.9% from 3%.

The Federal Reserve Bank of New York's Consumer Expectations Survey (SCE) will be released on August 14, and Trading Economics forecasts consumer inflation expectations to remain unchanged at 3.8%.

Everything about September

The Federal Open Market Committee (FOMC), which sets interest rates, will hold its next two-day policy meeting in September.

According to CME Group's FedWatch tool, the futures market is scheduled to pause interest rate hikes next month and keep the benchmark federal funds rate in a range of 5.25% to 5.50%. Only 33% of investors expect a rate hike in November, and 32% expect a rate hike in December.

However, Fed officials gave mixed information about the possible actions of the Fed next month, mentioning that an employment report and another CPI report will be released before the September FOMC meeting.

Speaking to reporters at last month's post-FOMC press conference, Fed Chairman Jerome Powell did not say what action the central bank would take in September, saying only that the final decision was "in the making."

Powell told the media: "I would say that if the data prove necessary, we certainly have the possibility of raising rates again at the September meeting." I would also say that we may also choose to stand still at that meeting. ”

The Fed chairman reiterated that he does not expect inflation to return to the agency's 2 percent target until 2025.

Philadelphia Fed President Patrick Harker said that given where inflation has moved since it peaked at 9.1% in June, it may be time to hold off on raising interest rates.

"Without any amazing new data between now and mid-September, we may have reached the point where we can patiently keep interest rates steady and let the monetary policy actions we have already taken work," Harker said at the Fed's virtual community event on August 10. ”