Slowing inflation in the United States remains a hot topic among equity investors as the Federal Reserve continues to grapple with rising prices in the United States. The next set of US CPI data for September is set to be released on October 13 and until then, uncertainty abounds. This is how US inflation has risen and fallen in recent months – From 8.6% in May, US inflation rose to 9.1% in June, then fell to 8.5% in July before stabilizing at 8.3% in August 2022.
Market-implied inflation expectations for the next two years have fallen from 4.9% in March to around 2.3%, suggesting traders believe price pressures would ease closer to the target. the Fed, theoretically paving the way for a dovish policy shift.
However, according to Goldman’s Mueller-Glissmann, those hopes are too low. Moreover, it would not be the first time that expectations of a spike in inflation have been disappointed. Many market participants were caught off guard when the US consumer price index rose 8.3% more than expected in August from a year earlier. Core data from the PCE, the Fed’s favorite inflation indicator, also beat expectations last week.
Inflation data in August fell short of expectations, leading the Fed to remain aggressive in its approach to inflation management. Overall, the Fed raised rates by 300 basis points in 2022 and, according to José Torres, senior economist at Interactive Brokers, inflation could slow while demand is expected to decline.
Overall, demand in the economy is slowing while production still faces many challenges. Unfilled orders continue to rise as the industrial sector continues to face supply chain disruptions and material and labor shortages. Higher inventory and lower new orders indicate lower demand as buyers stop ordering and sellers cannot move goods fast enough.
August’s durable goods report is negative for Q3 GDP outlook but slightly positive for inflation. Less demand means companies don’t have as many customers to sell to, reducing price pressures.
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Rising inventories also indicate that businesses are holding too many goods that they would like to sell. Again, price pressures are easing as they increasingly reach an uncomfortable level of inventory and drive prices down as a strategy to attract customers and get rid of excess inventory.
We see durable goods and commodity inputs declining across the board. Whether it’s crude oil, natural gas, copper, metals or wheat, they’re all off their peaks because inflation is slowing as demand slows.
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A continued slowdown is needed for the Fed to hit its 2% inflation target and release its brakes. Unfortunately, most of the inflationary pressure comes from services and not goods, while wages and rents remain the main drivers.