The last mile is the hardest, and that’s true whether you’re running a marathon or trying to tame inflation.
Annual inflation has come a long way. It peaked at 9.1% in June 2022, when prices rose in almost all categories of the CPI. Nowadays, the decline is due to energy prices, which fell by almost 17% in June compared to last year; Used car and truck prices down 5.2%; and airfares, appliances, health insurance and shoes, all cheaper than a year ago.
But the fall was actually due to inflation surviving a couple of big months. In June 2022 alone, the CPI increased by 1.2%. Replacing this with the monthly increase of 0.2% in June 2023 reduced the annual change by one percentage point.
We won’t see that next month as the CPI was flat in July 2022. This means that the annual change in the index will be higher next month if inflation is greater than zero. If monthly inflation returns to its pre-pandemic, QE-period average in the second half of 2023, the annual CPI change will be 3.9% in December, according to Bianco Research. Inflation will appear to be accelerating again.
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Stop us if you’ve heard this before: the final push towards 2% inflation is likely to be more difficult – and more difficult for financial markets. “Indeed, the ‘free disinflationary lunch’ of rapidly falling energy prices, a slowdown in food price inflation and easing core inflation is now largely over,” writes Gregory Daco, chief economist at EY-Parthenon. “Any additional disinflationary momentum must come from slower monthly increases in core service prices.”
The next phase of disinflation, according to many economists, will require an elusive easing of the US jobs market. Achieving this may require a significantly weaker overall economy, testing the Federal Reserve’s resolve to stay the course while potentially weighing on stock prices.
The Fed’s Interest Rate Committee meets on July 25-26, and the futures market is overwhelmingly expecting a quarter-point hike in interest rates. We will have two more months of inflation and employment data ahead of the next conference on September 19-20. For the time being, the pricing on the futures market suggests that interest rates will not change.
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Progress is progress, but don’t confuse it with victory. The Fed won’t do it.
write to Nicholas Jasinski at nicholas.jasinski@barrons.com