MFN - US inflation pressures continue to abate

Stefan Gerlach

Great care must be exercised when commenting on the CPI data for July. The BLS announced that headline inflation was 3.2% year-on-year (y/y) and core inflation was 4.7%. (Using seasonally adjusted data, headline inflation was 3.3% and core inflation was 4.7% y/y.) Since headline inflation was 3.0% in June, it is easy to conclude that inflation pressures intensified.

Source: Data as of 10 August 2023.

However, the monthly headline inflation rate fell from 0.18% in June to 0.17% in July and monthly core inflation remained at 0.16%. Thus, the incoming inflation data continue to remain weak. The reason why headline inflation measured over 12 months rose is due to the “base effect.” Every month there is a new monthly inflation rate added and the monthly inflation rate 12 months ago drops out. As the figure below shows, the June 2022 monthly inflation rate that dropped out of the prior calculation was 1.2%, leading to large fall in June 2023 inflation. The July 2022 monthly rate that was dropped from yesterday’s release was 0.0% while the monthly increase in July this year was 0.2%, hence the increase in the yearly rate.

Source: BLS. Data as of 10 August 2023.

Since March, the monthly inflation rate has averaged 0.178%. If monthly inflation were to stay at this level, headline inflation measured over 12 months would quickly fall to the 2% level as shown in the graph below. The outlook for headline inflation is thus rosy.

Source: EFG calculations on data from BLS. Data as of 10 August 2023.

While the outlook for core inflation is less good, progress has also been made here. The figure below shows that it peaked in September 2022 and has since been falling very gradually. One reason is that prices for services ex energy services have been rising rapidly. The shelter component, which constitutes more than 40% of core CPI, has been particularly strong but has now started falling. Market commentary indicates that new rents have ceased rising, which will be increasingly reflected in the shelter component in the coming months. Inflation as measured by services prices ex energy and shelter is already running below 4%, raising expectations that core inflation will soon fall to that level too.

Source: EFG calculations on data from BLS. Data as of 10 August 2023.

Overall, inflation in the US is continuing to decline, but slowly. Members of the Federal Open Market Committee will be pleased that monthly headline inflation in recent months has been running at an annual rate of about 2%. They will emphasise that elevated core inflation is mainly due to the shelter component, which rose inexorably until March but has since fallen four months in a row. Chances are thus good that the Fed will decide not to raise rates in September. There is one more CPI release before then which will be watched closely to settle the issue.

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