Inflation takes a first step in the right direction

DEWITT, Mich. - Aug. 16, 2022 - PRLog -- Last week both CPI (consumer price index) and PPI (producer price index) inflation data for the month of July moved lower. After surprising to the upside last month, markets welcomed the lower-than-expected headline and core readings. However, inflation remains elevated compared with almost any period in history, and we would expect the Federal Reserve to continue to push rates higher in this backdrop. Nonetheless, investors cheered this first step in the right direction. While we may see increased volatility in the weeks ahead, if inflation continues to moderate consistently, markets could be poised for a more sustained rally longer-term.

Headline CPI was notably lower than last month, while core CPI came in largely in line

As many expected, headline inflation came in nicely below expectations for the month of July, largely driven by lower fuel and energy prices. In July we had seen average U.S. gasoline prices fall by around 8% and WTI crude oil down by 11% over the month of June¹. This supported a headline CPI inflation that came in at 8.5%, versus expectations of 8.7%, and below last month's 9.1% reading. But perhaps the more pleasant surprise for markets was the lower-than-expected core inflation reading, which came in at 5.9% year-over-year, versus a forecast of 6.1%. This was driven by lower prices in areas like used cars, select apparel, and airline fares. Over time, we would expect the impact of a cooling housing market and a potentially softening labor market to continue to put downward pressure on core inflation, albeit with a lagging impact.

PPI figures were similar – elevated but moving in the right direction

Like the CPI reading, U.S. PPI figures also came in below expectations, although they remain elevated versus history as well. Headline PPI came in at 9.8% year-over-year, versus an expectation of 10.4%, and well below last month's 11.3% reading, benefiting from the lower energy prices¹. Core PPI came in at 7.6%, also below forecasts of 7.8%. Producers generally are also benefiting from gradually improving global supply chains, as evidenced by measures like better delivery times, lower shipping-container rates, and a decline in the Fed's Global Supply Chain Pressure Index. Over time, if both the demand and supply drivers of inflation move in the right direction (softer demand and improved supply), prices may be able to move more sustainably back toward pre-pandemic levels.

Source: 1. Bloomberg