Car rates

Inflation break?

July brought some relief on the inflation front. Due to a 4.6% drop in energy prices, the overall consumer price index (CPI) for the month was Nope inflation. The stock market took the news to heart, so much so that the benchmark S&P 500 rose 1.7% at the opening bell. Investors seem to think the good news will convince the Federal Reserve (Fed) to abandon its anti-inflationary efforts, stop raising interest rates and provide more generous liquidity to financial markets. If the Fed reacted this way, it would be making a big mistake. One month does not reverse any trend, especially one that has accelerated considerably for over a year. The details of this latest CPI report make this clear.

Food is the first consideration. It’s the biggest chunk of America’s household budget, and it grew 1.1% in July alone, an annual inflation rate of 14% and a marked acceleration from the 10.9% average over the of the last 12 months. This image alone, independently of any other consideration, puts pressure on households and the Fed, and also has political ramifications.

Energy prices are also unlikely to continue in the coming months to provide the relief they provided in July. For some time now, a shortage of refining capacity has caused gasoline and heating oil prices to rise faster than crude oil prices. The drop in retail energy prices in July seems to indicate that the production of refined products has finally caught up with demand. Now that this adjustment is more or less complete, gasoline and heating oil prices should return to follow those of crude oil. And those prices have gone up again. The price per barrel of benchmark quality West Texas Intermediate hit a low of $88.54 in early August. Since then, it has risen to $91.41 a barrel. Although it does not go further, the rise already in place points to a 3.2% rise in retail energy prices in August and a reversal of much of the July decline.

For the rest of the inflation index – the so-called “core” measure, which excludes food and energy – July brought only modest relief. This measure between April and June increased between 0.6% and 0.7% per month or at an average annual rate of 7.8%. July showed a monthly gain of 0.3% or an annual rate of 3.7%. If this were to hold, it would still top the Fed’s preferred inflation of 2.0%. But it is not clear that the economy will achieve even this relative moderation in inflation.

Part of the pause in “core” inflation in July reflected a 0.5% drop in prices for transport services, a direct consequence of lower energy prices which, as we have already indicated, should not persist. A 0.4% drop in used car prices also helped dampen the pace of core inflation in July, but this is a notoriously volatile component of the CPI and is also probable that it increases in August that it repeats its decline. In the face of these unreliable sources of relief, rent and house prices continued in July to post the annual rate of increase of 8% that they had averaged all year, while, worryingly, the price medical services accelerated from the 4% annual rate of increase it had averaged so far this year to a 5% annual rate in July.

Of course, anything is possible, but the odds suggest three things: Things aren’t as good as the numbers suggest. If there is any relief in the outlook, inflation will continue at an unacceptable and burdensome pace. The Fed would be making a mistake if it went back on its stated desire to maintain its anti-inflationary policies.