Marketmind: A sticky inflation situation

A look at the day ahead in U.S. and global markets by Amanda Cooper

Everyone is laser-focused on U.S. inflation right now. With a relentless set of rate hikes, the Federal Reserve has managed to drive consumer price increases down to 3%, from last June’s 9.1%. Part of the decline has been down to base effects, where prices this year aren’t much higher than they were during 2022’s huge surges.

The uptick in the cost of natural gas, gasoline and over the past few weeks has prompted economists to forecast a rise in Thursday’s headline rate of inflation in July to 3.3%, from the previous month’s 3.0%, which would mark the first increase since June 2022.

Gasoline prices at the pump are up 8% on where they were a month ago, according to the American Automobile Association – an unwelcome development right in the middle of the summer driving season. However, they’re still down 5% from last year and well below the eye-watering $5 a gallon in June 2022. Crude oil has risen 15% in the last month, offering a reminder of how the world’s biggest exporters might not be able to regulate demand, but they can tweak supply. have risen to five-month highs as hot weather has kept everyone cranking up the A/C. But they’re not only down 65% from this time last year, on a seasonal basis, they’re largely back in line with pre-pandemic levels.

Traders are all but convinced the Fed will raise rates one last time in September and then look to cut rates some time in 2024. So a higher headline print might, on the surface, risk muddying that view.

Looking at stickier measures of inflation, a number of those have been dropping dramatically lately, which would suggest that the broad-based rise in energy prices might not unsettle investors too much.

Rent, used-car prices and the cost of “stickier” goods are dropping fast. Annual wage growth is almost half what it was in 2020 and the red-hot housing market is losing some steam.

Economists at Japanese bank MUFG point to the Federal Reserve Bank of Cleveland’s index of rent for new tenants – a new tenancy will typically see a higher price rise than a rolling one. The broader CPI rental component tends to lag the Cleveland Fed’s new-tenant rental index by six months, they say, meaning that rents could well be the next shoe to drop in the inflation story and could help offset upside risk from energy prices, MUFG say.

The Atlanta Fed compiles an index of core sticky consumer prices – goods or services for which the cost changes far more slowly. In June, the index showed a rise of 5.6%. This was up from last June’s 5.4% rate, but it marked the slowest annual increase since August 2021, of just 20 basis points.

The Atlanta Fed includes a variety of goods and services in the index and assigns them a rating based on their influence on overall CPI. The biggest weight is food away from home, with a score of 6.5, followed by rent for primary residence, at 6.0 and recreation at 5.7. The index includes baby and toddler clothes, vehicle maintenance and repair and car insurance among others.

Used cars were one of the major inflationary goods when the pandemic struck, as global supply chains snarled up and and created a huge shortage of new vehicles.

Second-hand car prices fell for 11 months in a row in July. This is their longest consecutive stretch of declines in a decade, after an unbroken 27 months of increases to August 2022 and are now nearly 12% below where they were this time last year, according to the most recent Manheim used vehicle index. In April 2021, the index showed an annual rise of 54%.

Key developments that should provide more direction to U.S. markets later on Thursday:

* July consumer price index (CPI)

* Federal Reserve Bank of San Francisco President Mary Daly is interviewed on Yahoo Finance, 0800 PDT/1100 EDT/1500 GMT.

* Federal Reserve Bank of Atlanta President Raphael Bostic gives welcome remarks at a webinar, 1500 EDT/1900 GMT.

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