While inflation is still tearing through the country, recent reports indicate that it may be cresting as the Federal Reserve continues its historic interest rate-hiking cycle.
This week’s release of the July consumer price index numbers showed that inflation didn’t increase from June to July, although it is still 8.5% higher than a year ago. The reading was better than many economists had anticipated but is still magnitudes higher than the central bank’s 2% inflation target.
The day after the report was released, the producer price index for July was published. Inflation as measured by producer wholesale prices slowed to 9.8% for the year ending in July, according to the Bureau of Labor Statistics.
That year-over-year inflation rate was down from 11.3% the month before and lower than forecasters expected. On a month-to-month basis, the producer price index declined by 0.5%.
NEVERTHELESS, INFLATION PERSISTED
In response to the soaring inflation, the central bank has been hiking interest rates in the most aggressive fashion in decades.
In July, following a two-day meeting, central bank officials announced that the Fed would increase its interest rate target by three-quarters of a percentage point. That follows another 75 basis point hike in June. The Fed usually hikes rates by just a quarter of a percentage point, so the back-to-back increases were equivalent to six standard rate hikes in just two months.
The seemingly cresting inflation is likely, at least in part, a result of the Fed slamming the brakes on the economy.
Another better-than-expected report this week was the monthly Survey of Consumer Expectations for July released by the Federal Reserve Bank of New York, which showed that expectations of future inflation are falling.
The report found “substantial declines” in short-, medium-, and long-term inflation expectations. One-year inflation expectations plunged from 6.8% to 6.2%, and three-year-ahead expectations dropped from 3.6% to 3.2%.
The July figures mark the most notable decline in inflation expectations since they began jolting upward last year.
Campbell Harvey, a finance professor at Duke University’s Fuqua School of Business, told the Washington Examiner that while it appears as though inflation is peaking and is unlikely to tick back up on an annual basis, prices will remain elevated in the months to come despite the aggressive rate hikes.
Harvey pointed out that while gasoline prices and the cost of other goods might be falling, the most important component of the consumer price index is shelter. He explained that because of the way the housing market and rents work, it might take longer for those high prices to be reflected in inflation reports.
Harvey noted, for instance, that a 10% increase in rents only hits renters when their leases expire and they sign a new lease, so the cost hike is staggered. “So effectively the rental and housing inflation — we’ve already realized it, but it’s not reflected in the data yet,” he said.
“This is a key reason that inflation will likely remain elevated,” he added.
The median existing-home sales price rose to $416,000, up 13.4% for the 12 months ending in June. The hike marks 124 consecutive months of year-over-year price increases, the longest recorded streak, according to a report by the National Association of Realtors released Wednesday.
Housing has become less affordable thanks to higher mortgage rates, which are a side effect of the Fed’s historic tightening cycle.
Raising rates has the effect of slowing spending, and the gross domestic product has declined in the past two consecutive quarters, which many economists take as a sign of recessionary conditions.
Despite the negative growth, there was a bit of positive news with the July employment report.
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The economy once again exceeded consensus forecasts and added 528,000 jobs in July. The unemployment rate also unexpectedly fell to 3.5%, matching the ultra-low level it was at prior to the pandemic.
The labor market has overperformed despite the rate hikes, which is good news because it means that the Fed has more leeway in conducting big hikes to drive down inflation better than it might have if the unemployment rate were trending upward.
