Three reasons not to despair over record US inflation

When the latest US consumer price data came out last Wednesday, the headline number was ugly.

Inflation rose to 9.1% in June, according to data from the Bureau of Labor Statistics. That was higher than economists consulted by Refinitiv were predicting.

It was also much higher than the 8.6% rate recorded in May, which rocked financial markets and pushed the Federal Reserve to raise interest rates more aggressively — renewing fears about whether the central bank could rein in inflation without triggering a recession.

Investors were bracing for a surprise. But there is reason to believe that Wall Street’s response to the numbers will be softer than last month.

“Both policymakers and investors will take this new high with ease,” Joseph Brusuelas, chief economist at RSM US, told me.

Because? Inflation data reveal that, while the situation is worrying, there are some reasons for optimism.

1. Core inflation

Annual core inflation, which excludes volatile food and energy prices, appears to have peaked in March. Federal Reserve officials are most concerned when there are signs that inflation is widespread, so this provides some hope that the underlying situation is improving, even with grocery and fuel prices out of control.

Core inflation in the 12 months through June fell to 5.9% from 6% in May. It could continue to decline if consumer demand for goods continues to decline, as shoppers balk at high prices and redirect their income towards services like dining out.

2. Oil prices

Concerns over whether the global economy could slip into recession have dampened expectations for fuel demand, helping to ease pressure on US gasoline prices this month.

The average price for a gallon of regular gas on Wednesday was $4.63, compared to $4.78 a week ago and $5.01 a month ago.

This was not reflected in the June data, as gasoline prices hit a record high when the Bureau of Labor Statistics analyzed the CPI numbers. The gasoline index rose 11.2% between May and June.

But that means July is likely to look better – and markets like to look ahead.

3. Long-term inflation expectations

A survey by the Federal Reserve Bank of New York published this week showed that while expectations for consumer inflation for next year marked a new high in June, expectations for the medium and long term fell.

This indicates that US consumers still believe the Fed can rein in the inflation situation by raising interest rates and ending crisis-era bond purchases.

The economy may slow down, but price stability will eventually be restored, as will the much-maligned credibility of central banks.

That said: core inflation is still extremely high and well above the central bank’s target of around 2%. And there are signs that inflationary pressures are spreading to parts of the economy where they are likely to remain for some time, such as housing and rent.

The shelter index rose 5.6% last year. That was the biggest increase since February 1991. The price of home furniture jumped 9.5% over the same period, while airline tickets jumped more than 34%.

Looking ahead: When inflation starts to fall, will it go back to where it was before the pandemic?

Senior officials, including Federal Reserve Chair Jerome Powell and Agustín Carstens, who heads the Bank for International Settlements, acknowledged at a summit in Portugal late last month that there is a risk that we could enter a period of persistently higher inflation. if central banks don’t get the situation under control soon.

“The biggest question, I think, is are we transitioning from a low-inflation regime to a high-inflation regime?” said Brusuelas.