ANALYSIS: Is Another Wave of Inflation Happening?

A woman shops for groceries at a supermarket in Monterey Park, Calif., on Oct. 19, 2022. Frederic J. Brown/AFP via Getty Images

Following the latest inflation data, U.S. financial markets are asking two questions. First, is this the beginning of an inflation revival? Second, how will the recent numbers impact the Federal Reserve’s monetary policy decision-making?

In July, the annual inflation rate edged up to 3.2 percent, marking the first increase in the growth rate in a year. The core consumer price index (CPI), which strips the volatile food and energy components, remains stubbornly high at 4.7 percent.

Producer prices also experienced a notable jump, rising to 0.8 percent year-over-year in July. The core producer price index (PPI) was stuck at a higher-than-expected 2.4 percent.

Inflation in the Second Half

Despite the substantial surge in crude oil and gasoline prices, the gains didn’t fully materialize in the Bureau of Labor Statistics’ (BLS) CPI report.

“The July CPI report obviously missed this energy price spike, and we now expect it to show up in the August CPI report, putting further upward pressure on inflation year-on-year,” wrote Scott Anderson, the chief economist at Bank of the West Economics, in a note.

Over the past three months, West Texas Intermediate (WTI) crude prices have climbed nearly 20 percent to above $83 per barrel. Gasoline prices have also soared, rising about 20 percent year-to-date and topping $3.84 a gallon, according to (AAA).

The Federal Reserve Bank of Philadelphia revised its Inflation Nowcasting model estimate for August lower. The regional central bank now expects the annual inflation rate to be 3.8 percent, down from the previous forecast of 4.1 percent. The core CPI is anticipated to edge lower to 4.5 percent.

Peter Schiff, the chief global strategist at Euro Pacific Asset Management, thinks the upward trend in the July inflation is only the start of renewed price pressures.

“Core is bottoming, and the headline number is about to rise sharply, led higher by surging #oil prices,” he said on X, formerly known as Twitter.

“Today’s hotter than expected [0].3 [percent] rise in July PPI is only the beginning. Future, even larger upside surprises are coming,” Mr. Schiff wrote in another X post.

People use a gas station in Columbia, Md., on May 17, 2023. Madalina Vasiliu/The Epoch Times

Appearing on CNBC following the release of the wholesale prices data on Aug. 11, Heritage Foundation economist EJ Antoni also anticipates inflation to continue rising, arguing that many of the categories within the PPI—foods and feeds, energy goods, and transportation and warehousing—will likely be revised upward over the next six months.

Some market experts say that the PPI is a reliable indicator of where inflation might be heading because it measures the price at which producers can sell their goods. The CPI gauges the price that shoppers pay for goods and services.

Ali Dhanji, a financial advisor at Raymond James, said that the PPI “is not great news for Federal Reserve as PPI tends to be a leading indicator for consumer inflation and signals potential inflation ahead.”

“YoY PPI up for the first time in 13 months,” he wrote on X. “More data needed to convince Fed’s 2 [percent] target.”

Meanwhile, ING economists believe that the July CPI data point to a persistent easing of inflation pressures. At the same time, there could be a divergence between the headline and core inflation measurements this fall.

“Unfortunately, we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October,” wrote James Knightley, the chief international economist at ING, in a research note. “Core inflation won’t have this problem as the 0.6 [percent] MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2 [percent] readings we predict, allowing annual core inflation to slow to below 4 [percent] by September.”

But one economist thinks that there will be an inflation surge later this year.

“Reported 12-month inflation rates are likely to edge up a few tenths of a percentage point over the next several months, and then jump in late fall, hitting 3.9 [percent] in December before dropping quickly after that. The reason for the November-December surge: Temporary price declines that happened 12 months prior will result in bigger year-over-year inflation readings as 2023 ends,” wrote David Payne, a staff economist at Kiplinger.

Former Treasury Secretary Larry Summers said earlier this month that inflation could resurge, citing higher wages.

“I don’t think we can yet be confident that we’re not going to see a real acceleration of inflation at some point down the road,” Mr. Summers told Bloomberg on Aug. 4. “That’s the thing that I’m focused on.”

In July, annualized hourly earnings were unchanged at 4.4 percent.

According to Bloomberg Television host Lisa Abramowicz, market-implied inflation projections for the next five to 10 years have climbed to their highest levels in about a year.

“Traders are starting to game out a future with sustainably higher inflation and higher long-term bond yields,” Ms. Abramowicz said on X.

Consumers are more optimistic, as their inflation expectations have been trending downward since last spring.

The University of Michigan’s one-year inflation expectations index dipped to 3.3 percent in August, down from 3.4 percent in July. Five-year inflation expectations also edged down from 3 percent to 2.9 percent.

The Federal Reserve Bank of New York’s Survey of Consumer Expectations will be released on Aug. 14, and Trading Economics predicts consumer inflation expectations will remain unchanged at 3.8 percent.

All About September

The rate-setting Federal Open Market Committee (FOMC) will convene its next two-day policy meeting in September.

According to the CME FedWatch Tool, the futures market is pricing in a rate pause next month, keeping the benchmark fed funds rate in a range of 5.25 percent and 5.50 percent. Only 33 percent of investors expect a rate hike in November, and 32 percent forecast a rate increase in December.

But a chorus of Fed officials has offered mixed messaging on what the central bank could do next month, citing one more jobs report and another CPI release before the September FOMC meeting.

Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting in Washington on May 3, 2023. Anna Moneymaker/Getty Images

Speaking to reporters at the post-FOMC press conference in July, Fed Chair Jerome Powell didn’t convey what the central bank will do in September, saying that a final decision is “live.”

“I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted it,” Mr. Powell told the press. “And I would also say it’s possible that we would choose to hold steady at that meeting.”

The Fed chief reiterated that he doesn’t expect inflation to return to the institution’s 2 percent target until 2025.

Considering the path of inflation since hitting a June peak of 9.1 percent, it could be time to leave rates alone for the time being, says Philadelphia Fed Bank President Patrick Harker.

“Absent any alarming new data between now and mid-September, we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Mr. Harker said at a Fed Communities Virtual Event on Aug. 10.