US inflation moderated in July, handing relief to policymakers, even as households remained beset by generationally high price growth which continued to outpace wage gains for the majority of earners.
Headline CPI rose 8.5% YoY last month, hotly anticipated data out Wednesday showed (figure below). That was below the 8.7% economists projected.
The headline figure was widely expected to recede from four-decade highs reached the prior month thanks to a sharp drop in prices at the pump. The gasoline index declined 7.7% in July, offsetting increases in indexes for food and shelter.
The core gauge rose 5.9% on a 12-month basis, the same pace as June and also cooler than anticipated.
“We don’t often get pleasant surprises surrounding the US inflation data so July’s numbers are something to be cherished,” ING’s James Knightley remarked.
Fed officials are intently focused on monthly readings. There too, July’s report brought relief. The headline gauge was unchanged from June, the coolest MoM print since a small decline in May of 2020 (figure below).
More importantly, core prices rose a cooler-than-anticipated 0.3%. Economists saw a 0.5% rise.
BMO’s Ian Lyngen called the report “incremental confirmation that the Fed’s efforts to combat consumer price increases have been successful.”
Markets were likely to cheer the numbers. Both stocks and bonds rallied last month in part on the notion that a decelerating economy and an imminent “peak” in 12-month inflation prints might compel the Fed to dial back the most aggressive tightening campaign since the Volcker era.
A robust July jobs report and another disconcerting read on unit labor costs together argued against a more conciliatory Fed, and notwithstanding officials’ assurances, key data on worker compensation for the second quarter suggested a wage-price spiral is, in fact, embedding itself across the economy. In that context, a lot hinged on July’s CPI report. Had the headline and core gauges surprised to the upside, bets on an inter-meeting Fed hike would’ve proliferated.
Instead, the relatively benign prints took some of the edge off. If PCE prices likewise recede and August’s CPI report, due ahead of the September FOMC meeting, suggest a further moderation in price pressures, it’s possible the Fed could opt for a 50bps rate hike next month, an incrementally less hawkish stance that could be justified not only by “better” inflation data, but also the moderation in growth that’s evident everywhere except payrolls. “The combination of NFP and CPI for July leave the 75bps versus 50bps September hike debate alive and well,” Lyngen went on to say. “Moreover, this means volatility around incoming data will remain elevated.”
Now for the bad news. July’s CPI report was the furthest thing from comforting. “Benign” is a highly relative term.
The food at home gauge rose 1.3% from June, faster than the prior month’s pace. Electricity prices, meanwhile, rose 1.6% MoM, barely better than June’s rate. On an unadjusted, 12-month basis, grocery and electricity prices rose 13.1% and 15.2%, respectively (figure below).
That conjuncture has almost no precedent in modern American history. The YoY rise in grocery prices was the largest since March of 1979.
July’s 1.1% MoM increase in the broad food gauge was the seventh consecutive monthly increase of 0.9% or more. Indexes covering all six major grocery store food groups rose.
Monthly declines on the gasoline and natural gas indexes should be considered in context. On a 12-month basis, gas prices were 44% higher and natural gas 31%.
There was scant evidence of relief in the increasingly onerous cost of keeping a roof over one’s head. The shelter index rose 0.5% from June, and the rent index logged a 0.7% rise. Owners’ equivalent rent rose 0.6%.
The 5.7% 12-month increase on the shelter gauge was the largest since 1991 and perfectly matches the rise in home prices (figure on the left, below).
The figure on the right (above) is just another way to visualize the same dynamic. Shelter inflation will remain elevated for the foreseeable future. The die is cast on that front.
Elsewhere in the report, airline fares dropped sharply, used vehicle prices retreated from June while new vehicle prices rose, apparel costs notched a slight decline and medical services logged another monthly increase. Needless to say, every major category is up on a 12-month basis, and in most cases dramatically so.
“Core inflation remains on an upward trajectory due to rising housing rental costs and service sector inflation pressures,” ING’s Knightley wrote, adding that “wages are the biggest cost input for the service sector [and] in an environment where decent demand means companies can pass higher costs onto consumers, we don’t see core inflation peaking until around September/October.”
Invariably, The White House will herald July’s CPI report, claiming it’s a sign Joe Biden’s efforts to bring down gas prices are working and that inflation may have crested. When considered with the so-called “Inflation Reduction Act” (which virtually no one believes will have any impact on inflation at all), Democrats are likely feeling much better about things now than they were a month ago.
But make no mistake: This is a false dawn. The US is nowhere near price stability and isn’t likely to be anytime soon. The Fed may take some comfort in the data, but if August’s CPI report isn’t an encore, it won’t matter. And in any case, even two months of “cool” prints won’t compel a true dovish pivot — not when “cool” still means three or four times target.
The bottom line for households is simple enough. It’s nice that gas prices are lower. But grocery bills are still rising, so are electricity bills and for most workers, inflation is running ahead of wage growth. Besides, it’s entirely possible that between the pandemic’s impact on global supply chains and geostrategic realignments related to the conflict in Ukraine, inflation won’t settle back to 2%. Or at least not sustainably and not in the absence of deep recessions.
With inflation running ahead of wage growth, can we really talk of a wage price spiral embedding itself in the wider economy?
Again – consumers have spent/wasted their stimulus checks, their debt load is rising, they’re losing ground in terms of real wages… Where is the demand going to come from?
The thing that really puzzles me is hours worked/productivity drops vs. job gains/openings… If you allegedly have a lack of workers and can’t fill the positions you want, shouldn’t you, as a stop gap measure, increase the amount of hours your existing workers are performing?
To a large degree, I think COVID distortions are not over yet and this makes data murky. I won’t say we’re in a recession. But things do not feel stable and, while I’ll again admit having been wrong on inflation, I still think that the Fed doesn’t need to hike 75 bps or 100 bps repeatedly. I mean, if they want to do one 1.5% and be done, fine. It’s likely to be really destructive to many assets but, in a way, that might get the job done better than three 50 bps hikes… but otherwise, I think they should tread carefully.
“With inflation running ahead of wage growth, can we really talk of a wage price spiral embedding itself in the wider economy?”
Yes. That’s the crux of the matter. What do you do when your wages aren’t keeping up with the increase in the price of the things you need to buy? You ask for a raise. Or you stop eating. Which do you reckon is more likely?
Productivity is the relationship between output and hours worked. Productivity will only rise if output rises faster than hours worked. What one wants to do is cut hours worked while maintaining output. That increases productivity and decreases the labor cost of output, increasing profits (at the worker’s expense).
Well overall it was positive as the trend is in the right direction. The reading of economic history suggests the economy of the post flu pandemic in the period from 1918-1920 looks like a fit- take a look at that period. If that is true we will be seeing real disinflation in a year or two. For now, the best we can hope for is for core inflation to recede a bit and for some government programs like the about to be passed and signed IRA bill to go forward. Economic statistics hide granular outcomes. If you are in the lower income strata say bottom 50%, much of the inflation is affecting you badly. You may have gotten a pop in the beginning of the pandemic from government programs or higher compensation but now you are squeezed. And if layoffs come it may hit you again. On the other hand if you are currently a homeowner, as many adults are- then the part of the inflation dedicated to owners equivalent rent (~40%) of CPI passes you by as you already own a home and inflation hurts but not as much. There are many other granular cohorts- these are just two. I will be waiting for Larry Summers and Muhammed El-Erian say that the Fed is still far behind the curve and that they have to raise rates a lot more. My view is that they are not far behind the curve anymore. The 2 year- 10 year spread and the 3 month ten year spread are telling you that the FOMC does not have that much further to go on their rate rise. How long they need to remain tight is another question. My own guess is only until sometime in the first half of 2023. My forecast can go in the garbage if there is another shock out there, however. Stay tuned.
They’re so far behind the curve now that the curve has lapped them. This is so laughable I can barely countenance it anymore. This ship has sailed. The horse left the barn last year. The genie got out of the bottle, wandered around the economy for a year, and is now so tired from his trip that he’s considering whether to go back into his bottle and take a nap out of sheer exhaustion.
If Vladimir Putin does something unhinged tomorrow, inflation could reaccelerate. If Xi Jinping locks down the whole country for COVID next week, inflation could reaccelerate. There are innumerable other “ifs” like that.
This isn’t 1990-2019. Inflation isn’t going to “settle.” It’s going to be wholly unpredictable for the foreseeable future and nobody is going to be able to accurately forecast it or effectively corral it when it gets out of control. On this point, I think, Zoltan Pozsar is correct. Inflation is stochastic now.
Jury is out. You could be right, but for now inflation staying high is a bet (as is eventual disinflation -my view). FOMC cannot make policy based on Xi or Putin. If the FOMC is so far behind then why isn’t inflation accelerating here now? Why are house prices stabilizing or falling? Why is the US $ so strong. Why are commodity prices weaker? Real time indicators suggest your statement could be “laughable” as well. On international geopolitics what happens if Iran gets back access to world markets. What if Russia has to back down in Ukraine and gas cut off? What happens if China changes policy and does something different to backstop real estate and takes a new approach to covid? Take a look at what happened post pandemic in the US in 1918- prices spiked for 2 years and the Fed raised rates and then the economy slowed significantly. Sound familiar?
No, it doesn’t sound familiar. Because it was 104 years ago. There’s nothing familiar about it. Historical parallels are useless.
The answer to your “why?” questions is “because.”
The truth about all of this (and Powell essentially admitted this in Sintra, out loud, to nervous, uncomfortable chuckles from Christine Lagarde and Andrew Bailey) is that nobody knows anything about anything. When we pretend like we do, the only way we’ll be right is if fortune happens to smile on us, as it did vis-a-vis inflation over the past 30 years. When it stopped smiling in 2020, we were rendered immediately and totally bereft in the forecasting department, not unlike what happens when, occasionally, forecasts for “light rain” turn into deadly floods and tornados.
This is the human condition. Doomed to hubris and, eventually, humiliation, in an endless cycle. On the bright side, we can predict how, if not precisely when, that cycle will end.
If we don’t know anything about anything, how do we manage our portfolio? Are death and taxes really our only certainties?
H> the only way we’ll be right is if fortune happens to smile on us.
Nassim Taleb has a lot to say about this, too. He mentioned the role of luck in his Black Swan book and has revisited the topic frequently since then.
Powell’s comment and short video clip from Sintra was buffoonish imho, but because I haven’t seen the entire event I’ve haven’t criticized him for contextual unknowns. But he definitely incriminated himself earlier this year in his testimony to Congress when he reported that the Fed realized inflation was no longer transitory last August and yet they kept the fiscal stimulus flowing. Perhaps the job is beyond him.
I will qualify that Putin’s inhumane aggression in Ukraine has distorted inflation dramatically no doubt making Powell’s job significantly more difficult.
The Fed has moved off ZIRP but the Fed funds rate is still at a historically low level, while inflation (both core and headline) hover at generational highs. The Fed has more work to do. Barring a much cooler headline in August, I think they go .75 again in September.
I shutter at the thought of all the people who rely on social security as their primary source of income. Unless they already own a home, the shelter inflation may just put many of them out on the street. It is sickening to think about…
Tom – didn’t I read this morning that Social Security Recpients will be getting a 9% COLA this year?
Those old geezers will be helped a smidgen. Until Ron Johnson & Co regain control in DC and figure out how to eliminate the CPI ajustment?.
Olde geezer here – It sounds good but they’ll just increase the Medicare deduction again and poof!!! it was gone.
Agreed on the false dawn, I shouldn’t be, but I’m surprised the way markets are acting today. Food and electricity rose, the only reason it wasn’t a scorcher is because of gas prices.
I think Food At Home CPI (MOM) will start easing, given action in commodities (wheat, milk, corn, soy, etc). The pricing power of packaged food is notable (packaged and processed food rising more than fresh), but there is a volume tradeoff.
Gas CPI (MOM) may not see more large negatives, but as summer driving season winds down, it can flatten out.
Shelter CPI seems to lag rents and prices by several months, so if rents or prices start flattening, then market can discount Shelter MOM easing in mid 2023.
Don’t over-focus on YOY, which is backward-looking. Focus more on MOM. 0.2% MOM is about 2.4% annualized YOY, 0.3% is 3.7%, 0.4% is 4.9%.
Supply shocks take longer to unravel because supply takes longer to adjust than demand. And monetary policy has little influence there. Looking at history is not perfect but it contains clues. As for saying we don’t know anything, that’s a pretty much a cop out. Nobody can be certain of course but we can look at outcomes on a probabalistic basis. With tightening fiscal and monetary policy on the demand side, and father time on supply, I bet on disinflation.
Good points, thanks @jyl
how much do you agree with nouriel roubini who says stagflation is already here and a global debt crisis looms that the Fed cannot avoid or dare to pivot anytime soon ?
https://www.project-syndicate.org/commentary/great-stagflation-has-replaced-great-moderation-by-nouriel-roubini-2022-08?
https://www.theguardian.com/business/2022/jun/30/stagflationary-debt-crisis-us-recession?CMP=share_btn_tw
Agree with a lot of what he says, but could someone explain how the dollar loses its reserve currency status in a de-globalizing world? To be replaced by the renminbi/yuani? euro? pound sterling? yen? ruble? All of those countries/blocs have macroeconomic problems and unfavorable demographic issues of their own. Are we talking about a multipolar word with a handful of competing currencies? Even in that world, I have a hard time imagining the dollar not being in great demand.
Since oil is the basis of the dollar’s global value, global de-carbonization should logically lead to global de-dollarization. And who would want a “fully weaponized” global reserve currency anyway?
If he is right, the rich will get richer, the poor will get poorer and the middle class will disappear. There are only 614,387 bridges in the US. Claim your spot now before they are all gone.
Roubini is a perma-bear, who is right once a decade or so, and wrong the rest of the time. His arguments about structurally higher inflation going forward make sense to me. Less globalized supply chains, lower growth in workforce, climate change impacts, etc. THe key thing, though, is when those factors start to manifest in markets. If ten years from now, makes no practical difference to most of us. If two years, then I’m interested.
i have been following him closely & he is definitely not a perma bear. he wasnt a bear during the qe phases in the past decade
“even two months of “cool” prints won’t compel a true dovish pivot”
I think a couple of the Governors have been explicit that they want to see a series of monthly prints close to zero-ish, right? I don’t recall if they were clear about this being headline or core.
Chair Powell did talk in the press conference about the lagged effect of monetary policy and that at some point the Fed could pause and wait to see the effects of its hikes (I think I am remembering this right).
So there is a third option, neither “press-on” nor “pivot”, but “pause”.
Investors would probably be fine with a pause, in the short term anyway.
I’m a bit surprised that there isn’t more talk of energy here, and only one mention of climate impacts (which are already showing their teeth decades ahead of schedule). When energy supply is crunched again, high prices will only create so much demand destruction. Energy is energy, can’t work without it, and the already poorly managed transition (decades late!) from fossil fuels will leave us with higher spikes, higher prices even during busts, and higher frequency of both. And the way it’s looking this won’t take a decade to materialize.
Different timescales?
Unless climate change is going to impact energy supply immediately or in the next several months, it is not in focus for a market that, I think, is looking very very short term – I mean, even shorter than it usually does.
Interestingly, that is probably the case in Europe. Drought, low rivers, barges can’t ship coal or oil, Norway preparing to limit electricity export, France nuclear output threatened by high water temps.
(I am frankly befuddled why the European indicies are holding up so well. The stocks are lowly valued, ok, but is it totally out to lunch to think that Germany and hence Europe are headed for a significant recession in the very near future?)