All eyes are on Tuesday’s consumer price index report, as it is a major indicator of whether or not inflation has peaked and is heading down.
The August CPI numbers are expected to show that inflation decelerated from the month before, a sign that the Federal Reserve’s historically aggressive tightening is beginning to ease upward price pressures. The consensus is that inflation will fall to 8.1% on an annual basis from July’s 8.5%.
Should the number fall below 8.5%, it will mark two consecutive months of declining inflation and will clock in at the lowest that figure has been since February of this year. It would also indicate that U.S. inflation peaked at 9.1% in June amid soaring energy and food prices.
The Fed has been raising rates aggressively in the hopes of decreasing demand enough to lower the scorching prices.
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The central bank raised rates by half a percentage point in May and then took the even more aggressive step of hiking rates by three-fourths of a percentage point in June and July — the most ambitious hikes since 1994.
Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner that it is likely that Tuesday’s CPI report will show inflation continued to go down over the summer. He noted that energy prices, which are a big part of headline inflation, have declined.
The average price of gas in the United States broke record highs in June, surpassing $5 a gallon, according to AAA. Since then, oil prices have declined a bit, and gas is averaging $3.72 per gallon.
The gasoline index fell 7.7% in July, which offset increases in food and shelter costs. The energy index fell 4.6% on the month but is still up a sky-high 32.9% for the 12 months ending in July. Food prices have increased nearly 11% during that same period, according to the previous CPI report.
Lachman said that while there will be factors propping up August’s headline number — such as used car prices, rents, and housing prices — on balance, it is expected to fall as other goods decline in price.
“A number like 8% looks like a pretty reasonable sort of forecast,” he said. “I think inflation has certainly peaked, you just don’t know whether it’s going to come down very quickly, but the bottom line is that 8%, that’s still very high.”
The U.S. dollar has also been historically strong against other currencies, such as the British pound and the euro. It has been about at parity with the euro, the strongest it has been in more than a decade. That means import prices have fallen, boding well for Tuesday’s report.
Lachman contends that the Fed is expecting the CPI report to show inflation is falling but is still telegraphing that it will conduct another big rate hike later this month anyway. Members of the Federal Open Market Committee, which votes on monetary policy, have entered a media blackout period in which they are not permitted to speak to the press about the scale of potential rate hikes.
The current media blackout period began on Saturday and will last through the committee meeting set for Sept. 20 and 21, at which members are expected to decide on another large rate hike. While most investors were pricing in a still-aggressive 50 basis point hike just a month ago, Fed officials, such as Chairman Jerome Powell, have been more hawkish with their comments, increasing expectations for another massive 75 basis point hike.
The likelihood of a 75 basis point hike occurring was at 92% on Monday, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices. A month ago, those same odds were only pegged at 45%.
Tim Moe, chief Asia-Pacific equity strategist at Goldman Sachs, said it is the view of his firm that U.S. inflation has reached its zenith and that Tuesday’s report will lend credence to that notion.
“Our view is that U.S. inflation has probably peaked and will start to come off,” Moe said this week on Bloomberg TV.
He also pointed out that, on the downside, the jobs market still has more openings than the number of workers, meaning that the high demand for workers is pushing up wages and thus contributing to the country’s inflationary woes.
“The real sticky bit of inflation is, of course, in the labor market, and that’s where there’s some progress that’s been made. But a lot more that has to be accomplished,” Moe said.
But the labor market has also been a strong point in the overall U.S. economy and, in some respects, appears to have prevented the Fed, thus far, from sending the economy into a recession as it hikes interest rates.
While there have been two quarters of negative gross domestic product growth, something that typically signals the start of a recession, the unemployment rate has remained shockingly low — acting as a buffer for the supercharged rate increases.
The economy added 315,000 jobs last month, exceeding forecast expectations as it has for the past several months.
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Still, Tuesday’s CPI reading could come in hotter than expected, and there is a small chance inflation could have ticked up in August, although most economists believe that isn’t likely. Should inflation increase, though, it would likely cause many investors to panic, given how much the Fed has already raised rates to fight inflation.
“If inflation is above 8.5% tomorrow, the markets are going to freak out,” Lachman said.
