The last mile is the hardest, and that’s true whether you’re running a marathon or trying to tame inflation.
You wouldn’t know that from the market’s reaction to Wednesday’s inflation print, which saw the consumer price index rise just 3% in a year, the smallest increase since March 2021. The
Dow Jones Industrial Average
rose 2.3% this past week, the
S&P 500
added 2.4%, and the
Nasdaq Composite
jumped 3.3%. The two-year Treasury yield fell to 4.7% after topping 5% the previous week.
Annual inflation has come a long way. It peaked at 9.1% in June 2022, when prices were rising across nearly all categories of the CPI. These days, the decline is being driven by energy prices, which were down nearly 17% in June from a year earlier; prices of used cars and trucks, which fell 5.2%; and airline fares, appliances, health insurance, and footwear, all of which were cheaper than a year ago.
But the drop has really been about inflation lapping some big months. The CPI soared 1.2% in June 2022 alone. Replacing that with June 2023’s 0.2% month-over-month increase shaved a percentage point off the annual change.
We won’t see that next month, as the CPI was unchanged in July 2022. That means the annual change in the index will be higher next month if inflation is anything greater than zero. In fact, if monthly inflation averages its prepandemic, quantitative-easing-era average in the second half of 2023, the annual change in the CPI will be 3.9% in December, according to Bianco Research. It will look like inflation is reaccelerating.
Stop us if you’ve heard this before: The last push to 2% inflation is likely to be more difficult—and rockier for financial markets. “Indeed, the ‘free disinflationary lunch’ from rapidly falling energy prices, cooling food price inflation, and easing core goods inflation is now largely over,” writes Gregory Daco, chief economist at EY-Parthenon. “Any additional disinflationary momentum will have to come from slower month-over-month gains in core services prices.”
The next leg of disinflation will require some elusive loosening in the U.S. labor market, many economists say. It may take a meaningfully weaker overall economy to achieve that, testing the Federal Reserve’s resolve to stay the course, while potentially weighing on stock prices.
The Fed’s rate-setting committee meets on July 25-26, and the futures market is pricing in overwhelming odds of a quarter-point increase in the federal-funds rate. We’ll get two more months of inflation and employment data before the next confab on Sept. 19-20. For now, futures market pricing favors no change in rates.
Progress is progress, but don’t confuse it with victory. The Fed won’t.
Write to Nicholas Jasinski at [email protected]
Read the full article here
