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Headline inflation is likely to have peaked and is likely to slow in the coming months as energy prices fall.

The surge in energy prices last June, from the bogus rumors circulating the markets a day before the release to the thinly veiled innuendos from the White House, all indicated that US inflation was back above estimates of economists would rise. It was. Consumer prices rose significantly in June, beating expectations for the second straight month. They are also experiencing their strongest annual increase since November 1981, at +9.1% versus the average expected +8.8%. Without being entirely anecdotal, this number is not the most significant. On the one hand, because it’s significantly influenced by commodity prices, and the recent fall in energy prices – oil is down more than 20% from its June highs – will certainly lead to a decline in headline inflation in the coming months. On the other hand, the US Federal Reserve (Fed) focuses primarily on underlying inflation, ie consumer price developments excluding energy and food, as it cannot entirely ignore the impact of fuel or food costs on households.

And for that reason, the news is not reassuring. The decline in underlying inflation for the third straight month – it was 5.9% in June versus 6.0% in May and 6.5% when it peaked in March – is misleading. Breaking this variation down, we see that prices rose much more sharply in the second quarter of 2022 (7.8% yoy) than in the previous three quarters (5.3% yoy). In reality, the apparent fall in underlying inflation is only due to a favorable base effect as prices rose very sharply in the second quarter of 2021 (10.0% yoy). In other words, if non-energy and food non-energy goods and services prices continue where they have been over the past three months, core inflation should pick up again in the coming months. A perspective that the central bank does not really like.

In addition, the components of this “core” inflation also paint a far from reassuring picture. First, while showing signs of a turnaround for the past month or two, the prices of certain goods, notably household appliances and even computer equipment, began to rise sharply again in June, despite being in structural deflation. Next, the prices of services are rising everywhere, especially with an acceleration in the cost of health services against the background of high insurance premiums. After all, real estate prices continue to rise. The rent component rose 0.8% in June, the sharpest monthly change since October 1982, and took its annual change to its highest level since July 1986. The equivalent rent component, for its part, rose 0.7%, an unheard-of rate for 32 years, resulting in inflation at its highest level since September 1990. Figures that mean housing now accounts for more than half (61%) of underlying inflation.

However, real estate is one of the categories of the inflation basket considered to be the least volatile, i.e. those where the Fed must act as a priority if its actions on highly volatile components, such as the US dollar. B. those that are directly related to raw materials, materials are less important. And if a seasonal effect can partially explain this strong acceleration – the entry of new graduates into the housing market at this time of year, leading to massive indexation of these new rents – it is nonetheless a concern for the central bank. So it’s on a fault line. On the one hand, headline inflation has likely peaked and is likely to slow in the coming months thanks to falling energy prices. On the other hand, core inflation could pick up again, particularly driven by housing inflation, which has been at record highs for several decades. The priority the Fed gives to one dynamic or another will certainly depend on the magnitude of its next rate hike: 75 basis points or 100 basis points.

Writing completed on 7/18/2022

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