Focus is on next week’s US CPI report

Yesterday, Cleveland Fed Chair Loretta Mester said she wanted to see a few months of lower inflation before shelved rate hikes. A big test will come on Wednesday with data from July. This report will set the tone for next week’s trading and poses a major risk to the US dollar and equity markets.

The current consensus is +0.2% m/m and +8.7% y/y. The previous annual number was a cycle high at 9.1%.

RBC presents the report as a battle between falling energy prices and rising prices for most other things.

“The dip [in CPI] will likely reflect a slowdown in gasoline price growth due to lower oil prices. In contrast, year-over-year growth in food prices is unlikely to have changed much, with basic prices (excluding food and energy) up slightly from a year ago. Broader measures of price inflation are still very high. Over 70% of market basket items (excluding shelter) grew faster than 3% in June,” they wrote.

Gasoline prices in the US have fallen for 50 days in a row, which will mean a drop of around 10% m/m in July, with a similar drop concentrated in August.

JPM offers this graph to demonstrate the drag on global gasoline inflation.

Many companies are shaping their estimates right now, so the consensus could change over the weekend. The range is currently between 0.0% and +0.4% on the m/m figure. That’s 8.5% to 9.0% on the y/y data point.

Looking ahead, there are signs of peak inflation, but the growth in wages in today’s nonfarm payrolls report is a warning sign that even a drop could not lower inflation. CPI only at 5% against 9%. That would mean a series of much tougher Fed hikes, well above the 3.62% peak that the fed funds market is currently anticipating.

From RBC:

There are reasons to believe that inflation will continue to slow. Pressures on the global supply chain have eased in a more sustainable way since late spring, as shipping times and costs come down. Commodity prices, although very high, also followed a downward trend. And with high inflation and rising borrowing costs compressing consumers’ real purchasing power, there are already early signs of a slowdown in domestic consumer demand. Purchases of goods in volume have fallen in recent months, to 3% below levels of a year ago in June.

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