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15 August 2022
- Wednesday’s inflation in the US took everyone a bit by surprise. Judging by the markets’ reaction, most investors and analysts interpreted the better-than-expected numbers (i.e. a slight slowdown in annual inflation from its 40-year high in June) as a clear message to the Fed that perhaps it should start thinking about easing its aggressive approach to monetary policy. The annual inflation rate slowed to 8.5% in July from 9.1% in June and below market forecasts of 8.7%. Compared to the previous month, the CPI was unchanged. Annual core inflation was steady at 5.9%, beating expectations of 6.1% and on a monthly basis rose by 0.3%, with markets expecting a 0.5% rise after a 0.7% rise in June.
- Yes, the slowdown in inflation is excellent news, especially when we see that inflation is still not tamed in the most developed world. According to the CME Group’s FedWatch tool, investors today expect a 43.5% chance that the Fed will raise rates another 75bps at its next meeting, up from 68% before the inflation numbers. But Fed officials reiterated that the central bank still had work to do in taming inflation and are prepared to raise rates again by another 75bps.
- All is not as rosy as investors might have thought at first glance. Prices may have fallen in many areas, such as energy, fuel, utilities or food, but the annual rate of price increases here still exceeds 20 or 30%.
- Median inflation came in at 6.3%, and 16% trimmed-mean inflation reached 7%, neither of which shows any sign of slowing. As Spanish economist Daniel Lacalle commented, if you eat twelve doughnuts a day, and then you eat eleven, it is not “diet”.
- Economists also point to the strong labour market figures and the steady rise in labour costs. When inflation hit the 15% mark in the late 1970s and early 1980s, it was also not very stable, but labour costs rose steadily. So optimism in the markets may be premature, and one slight fall in inflation does not necessarily mean that the battle against rising prices has been won.
What to watch out for this week
- Data on the NAHB Housing Market Index, building permits, housing starts and existing home sales will shed light on the US housing market, which is expected to continue cooling.
- US Retail Sales for July reported on Wednesday will give us a picture of the strength of consumer spending after a slowdown in growth in the second quarter. Analysts expect only 0.1% after a 1.0% increase the previous month.
- The Fed Minutes will be released on Wednesday, which will be of great interest to investors in the context of slowing inflation and strong labour market numbers. However, it is generally expected to confirm that Fed officials are determined to continue to fight inflation at the pace they have set, and the decline in inflation is unlikely to change much of that stance.
- Interesting data will also come from the UK. Inflation is expected to rise again in July to 9.8% from June’s 9.4% and closer to the 13.3% that the BoE expects in October. In addition, robust data is expected from the labour market, where unemployment remains at a favourable 3.8%.
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