U.S. inflation has slowed down significantly over the past few months, but it faces risks of re-acceleration in the fourth quarter or next year, some analysts warned.
Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the yearly rate of inflation rose to 3.2% from 3% in the prior month, the first increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly increase slow to 4.7% from 4.8%, the slowest in almost two years.
On Friday the U.S. producer price index rose 0.3% in July, up from a revised flat reading in June and the core producer price index rose 0.2 in July, up from a 0.1% gain in the prior month.
“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX.
If the inflation rate in the same period of the previous year was very low even just a small monthly increase in CPI or PPI data in the current year will render a high inflation rate now and vice versa.
U.S. inflation accelerated aggressively in the first half of 2022, while it slowed down in the second half. In June 2022, the yearly CPI inflation rate peaked at 9.1%, before it started to fall.
The most challenging part in combating inflation was not slowing the yearly CPI inflation rate from 9% to 3%, but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera.
Julian Brigden, co-founder and president at Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden.
“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not too distant future,” said Bridgden.
Meanwhile, the U.S. economy remains resilient with unemployment numbers relatively low, supporting an elevated service sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy to grow 4.1% in the third quarter.
“In a service based economy based on consumption, with a core PCE that’s overwhelmingly driven by service sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice. Are they targeting 2% inflation or are they not?”
Read: Fed has ‘more work to do’ to get inflation back down, Daly says
Also read: Worker pay at center of Fed’s inflation fight
Federal Reserve chair Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s 2% target before 2025.
“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”
Earlier this year the elevated inflation made it difficult for companies to raise prices enough to offset cost rises, especially while while the Fed was raising interest rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” noted Brown.
U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
DJIA
gained 0.4%, and the S&P 500
SPX
was unchanged. The Nasdaq Composite
COMP
fell 0.5%.
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