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investing


HAS INFLATION PEAKED? HERE'S WHAT THE EXPERTS ARE SAYING


INFLATION DECELERATED BY MORE THAN EXPECTED IN JULY, BUT THAT DOESN'T MEAN OUR
ERA OF FAST-RISING PRICES – OR FED RATE HIKES – IS OVER.

by: Dan Burrows
August 10, 2022
August 10, 2022

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One month does not make a trend, but inflation did indeed moderate in July. 

The consumer price index rose 8.5% year-over-year – after jumping a scorching
9.1% in June – and was unchanged on a month-to-month basis. Core CPI, which
strips out volatile food and energy components, rose 5.9% from a year ago and
just 0.3% vs. June.

 * The 11 Most Expensive Cities in the U.S.

Both the headline and core inflation readings came in blessedly below forecast. 
But although the data offer a welcome respite for consumers – not to mention the
Federal Reserve's interest-rate setting committee – experts are split on where
consumer prices and Fed policy goes from here. 

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In order to get a sense of what economists and market strategists are thinking
about these latest developments, we've excerpted some of their commentary on the
July CPI report below:

 * "The July CPI report is a welcome relief for the economy. Markets seem to
   agree, based on the initial positive response of risk assets to the report.
   The Fed's forecast of a soft landing would be greatly improved if we see
   continued declines in core goods – particularly durables such as new and used
   cars and household furnishings –and a further slowdown in shelter inflation.
   We think this report is consistent with our forecast of a 50-basis-point [a
   basis point is one-one hundredth of a percentage point] hike in September.
   This morning's data confirms that we have seen a peak in inflation and
   endorses our view that peak Fed hawkishness is likely behind us." – Aditya
   Bhave, U.S. and global economist at BofA Securities

   

 * "Unlike the previous two CPI reports, today's CPI release provides some
   welcome news for members of the FOMC. That said, monetary policymakers have
   made clear that they need to see clear evidence of a sustained slowdown in
   inflation before pivoting on monetary policy. To that end, core CPI is still
   up 5.9% year-over-year and has grown at a 6.8% annualized pace over the past
   three months. In our view, it will take several more soft inflation prints
   before the FOMC begins to feel confident that it is getting price pressures
   in check. At least a 50-basis-point (bp) rate hike at the September FOMC
   meeting remains the most likely outcome." – Sarah House, senior economist at
   Wells Fargo Economics

   

 * "July core CPI rose by 0.31% month-over-month, below expectations and the
   slowest monthly pace since September. Declines in airfares and used car
   prices contributed to the slowdown, and we also note a sequentially slower
   but still elevated pace of shelter inflation. Headline CPI was unchanged,
   with the year-on-year rate falling 0.6 percentage point to 8.5% on lower
   gasoline prices." – Jan Hatzius, chief economist, Global Investment Research
   Division at Goldman Sachs 

   

 * "Inflation softened more than expected after months of upside surprises, led
   primarily by weaker core price pressures. This was driven by deflation in
   used cars, airline fares, and lodging, while shelter inflation held firm.
   Although the move is in the right direction, it is too early to say if the
   trend will be sustained. Today's inflation report increases the probability
   of a 50bp hike at the September meeting, which remains our baseline. However,
   a 75bp hike remains on the table, given that the Fed will have several more
   data points in hand, including new employment and CPI reports, before the
   decision." – Pooja Sriram, U.S. economist at Barclays Investment Bank

   

 * "While the headline inflation data today moderated a bit on the back of
   falling gasoline prices, it's still running at a worryingly high rate. Over
   time, we think the slowdown in economic growth (globally), the continuation
   of the Federal Reserve's assertive hiking cycle and the possibility of
   resolution with several persistent supply chain issues should influence broad
   inflation lower. Still, while Core PCE inflation (the Fed's favored measure)
   is likely to moderate in the coming months, it will still remain well-above
   the Fed's 2% inflation target. The persistence of still solid inflation data
   witnessed today, when combined with last week's strong labor market data, and
   perhaps especially the still solid wage gains, places Fed policymakers firmly
   on the path toward continuation of aggressive tightening. Indeed, we believe
   it's quite likely that the FOMC will raise policy rates another 75 basis
   points at the September 21 meeting, the third such substantial hike in a
   row." – Rick Rieder, BlackRock's chief investment officer of Global Fixed
   Income and head of the BlackRock's Global Allocation Investment Team

   

 * "Markets are enjoying the CPI report suggesting that inflationary pressures
   are easing, and the trajectory is moving in the right direction. With this
   CPI print, equity markets, already overbought, can certainly take a sigh of
   relief, but it still doesn't answer the question as to whether THE 'bottom'
   is in. Still, the lower than consensus estimate for headline inflation is
   undeniably good news for markets and consumers alike." – Quincy Krosby, chief
   global strategist at LPL Financial

   

 * "The July CPI report might be the first clear indication that consumers are
   pushing back against high inflation in response to tighter monetary policy.
   It's a sign that inflation is close to peaking, though the climb down the
   mountain will be slow due to rising wages and rents. The report will go some
   way to offsetting the impact of the strong July jobs report in the Fed's
   eyes, though policymakers will need to see more convincing evidence that
   inflation is heading toward the 2% target. The Fed will see one more jobs
   report and another CPI release before the September 20 to 21 meeting. For
   now, we lean toward a 50-basis-point (bp) rate hike in the face of weaker
   economic data and some moderation in consumers' long-run inflation
   expectations." – Sal Guatieri, senior economist at BMO Capital Markets

   

 * "The decline in Inflation, which peaked a few months ago, is now showing up
   in the headline data in a meaningful way. The Fed now has plenty of cover to
   reduce the pace and size of future rate hikes. This is really good news and
   decreases the odds of stagflations and the need for a big recession to break
   the back of embedded inflation." – Jamie Cox, managing partner at Harris
   Financial Group

   

 * "The bond market loves the number, and for a good reason. The inflation rate
   is still elevated at +8.5% YoY from +9.1% in June; the core inflation rate
   stayed at +5.9%, but that is still off the +6.5% March peak (and the
   consensus had been looking at a bump to +6.1%). Many goods items related to
   the dollar (appliances, apparel) declined, and we saw big relief in the
   airlines, used vehicles, rental cars, and education/communications. The price
   softness was breathtakingly broadly based. Excluding shelter, CPI was -0.3%,
   and this has not happened since May 2020." – David Rosenberg, founder and
   president of Rosenberg Research

   

 * "Headline CPI decelerated in July as gas prices declined, giving consumers
   some relief at the pump. Declining retail gas prices will likely give a
   much-needed boost to consumer confidence. Consumers feel the nagging
   pressures from rising shelter and food prices. Rising rental costs are
   especially troublesome. We could see rising rents continue in the near future
   as would-be home buyers recalibrate amid rising borrowing costs.
   Transportation costs declined over 2% from a month ago, perhaps a sign of
   cooling demand for travel. The Fed will have another inflation report before
   September's FOMC meeting and if August's inflation report is as good as this
   one, we could expect a 50 basis point hike instead of a more aggressive
   increase in rates." – Jeffrey Roach, chief economist at LPL Financial

   

 * "If we continue to see declining inflation prints, the Federal Reserve may
   start to slow the pace of monetary tightening and if the market starts to
   price in fewer rate hikes, we expect the yield curve to steepen. While the
   Fed has hiked interest rates by 225 bps already this year, the market is
   pricing in an additional 117 bps of hikes still to come in 2022." – Nancy
   Davis, founder of Quadratic Capital Management and portfolio manager of the
   Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) 

   

 * "July finally saw some good news for consumer prices, and not just with lower
   gas prices. The big runup in retailers' inventories since late 2021 is
   translating into more discounting for consumers. With the economy much cooler
   than in 2021, inventory levels higher, and gas prices down in the first ten
   days of August, inflation is probably past the peak. However, the U.S. is at
   risk of another surge in utility prices this coming winter if Europe suffers
   an energy shortage, which currently seems quite likely – British natural gas
   futures and German electricity futures are pricing in surges to prices that
   matched last winter's highs. Another tough winter heating season could hit
   consumers harder than last year's, since many households have spent down the
   financial cushions they built up during the pandemic. Inflation is likely to
   be stuck above 5% through the winter as utility prices stay high and global
   supplies of petroleum products stay tight." – Bill Adams, chief economist for
   Comerica Bank

   

 * "The market seems to be taking comfort in the fact that we're seemingly past
   peak inflation and we should continue to see declines in the second half of
   the year. It looks like the odds of another 75 basis point hike by the Fed
   have dipped significantly in the wake of this report and we could only see a
   50 basis point hike at the next meeting. If energy prices continue to fall,
   then I expect that we'll see inflationary data coming down in future months.
   This dynamic should support risk assets and we will likely see long term
   interest rates fall as well." – Brian Price, head of investment management
   for Commonwealth Financial Network

   

 * "As we've said all year, the Fed has its back against the wall and gets let
   up (on raising interest rates) until inflation starts coming back down. One
   month doesn't make a trend, but at least headline is coming down and core
   stopped going up. If we see future months' data showing a decrease in
   inflation, then it will help markets see the end of the tunnel in terms of
   rate hikes." – Chris  Zaccarelli, chief investment officer at Independent
   Advisor Alliance

 * 12 Cheapest Small Towns in America

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