A customer shop for eggs at a Kroger grocery store on August 15, 2022 in Houston, Texas.
Brandon Bell | Getty Images
Inflation is still hot, but is expected to ease in August, as petrol prices have plummeted, supply chains improve and travel costs have fallen.
The Consumer Price Index is released Tuesday at 8:30 a.m. ET, and the report could be a bit messy as headline inflation is expected to decline, while core inflation, excluding energy and food, should rise. The report is also important because it is expected to influence the Federal Reserve’s decision on how much to raise interest rates next week — and more importantly, over the long term.
According to the Dow Jones, the CPI for all commodities is actually forecast to decline 0.1% month-on-month in August, following flat readings in July. On an annualized basis, the headline CPI would then be trending at 8%, down from 8.5% in July.
But excluding gasoline, the core CPI is expected to rise 0.3%, similar to July. On a year-over-year basis, it would grow 6%, even warmer than the 5.9% growth in July.
As for the Federal Reserve, the report is widely expected to confirm that it needs to continue its fight against inflation with an interest rate hike of 0.75 percentage points next week, a third in a row. If inflation figures are weaker than expected, some economists say there is an outside chance the Fed could raise just half a percentage point.
“If anything, the risk is that it could weaken slightly,” said Anita Markoska, chief economist at Jefferies. “I have the energy stuff down 10.2%. It should drop by half a percent. I think the core is going to be more important.”
Gasoline prices are the biggest driver of the decline in energy. Since peaking at $5.01 in mid-June, the national average for unleaded gas has fallen all summer to an average of $3.71 a gallon on Monday, According to AAA.
Markowska expects the headline CPI to decline 0.2%, but could see a 0.3% increase. Shelter is one area that is expected to grow, while the prices of used cars are projected to decline.
“I think we’re going to repeat that in terms of airfares and hotel prices. They pulled the core CPI down last month. It looks like airfares will come down by 8%,” Markoska said. “They were up 40% from March to May. We’re opening a portion of that.”
Economists say the base effect of comparing the numbers to last year’s is behind the spurt in August core inflation.
“The base effects are expected to accelerate annual core inflation in the next two reports, which will make uncomfortable headlines for the Fed,” wrote T. Rowe Price’s chief US economist Blarina Urusi. She said this should not matter to Fed officials as they will be more focused on momentum, and will look at three-month and six-month annualized momentum.
,But they are also sensitive about how it will look to the people and the Congress. There’s even more reason to maintain a hawkish focus,” she said.
Strategists say the Fed’s September 21 rate decision may be influenced by the August CPI report, but the details of that report may be more important for what they say about the longer-term outlook. This could help shape expectations for the Fed’s end or terminal rate when it stops hiking.
looking to end the game
Market expectations for the Fed’s terminal rate are turning higher, and in the futures market, it will reach 4% early next year. Markowska expects it to reach 4% to 4.25% in January.
“This is where we start to see if there is a change in key patterns where the Fed may or may not bottom out,” said Diane Swonk, chief economist at KPMG. She expects the Fed to raise the fed funds target range to 75 basis points next week. This would move the fed funds target range from 3% to 3.25%. One basis point is 0.01 percentage point.
“It gets them into a tighter policy. Then it’s a question of how tight they want to go,” Swonk said.
That’s an important question for markets, as some professionals expect the Fed to stall by the end of the year. Others expect a pause early next year, and some investors believe the Fed will begin lowering interest rates in the second half of next year.
Fed officials, led by Chairman Jerome Powell, have emphasized that The Fed will raise rates and keep them there. Even so, the market is still betting that the Fed won’t be as tough as its point.
“I don’t think this report changes much for the Fed. I think the problem for the Fed is that inflation is slowing, growth is picking up in part because energy prices are low,” Markowska said. he said. “It’s increasing purchasing power.”
She said consumers are diverting the dollars that were going to fuel their cars to other goods and services. That could keep the economy warmer than the Fed wishes, and it now expects third-quarter growth of 3% or more.
“This is upward growth at a time when the Fed needs to engineer below trend growth,” Markoska said.