5 Ways Inflation is Cooling Ahead of Consumer Price Index Report

Financial investment volatility, up and down arrows profit graph due to Coronavirus crisis, businessman trying to balance like a tightrope walker so that volatility does not gobble up his investments.
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Investors and regulators alike are eagerly awaiting the June Consumer Price Index (CPI) data set to be released on July 13.

See: Ahead of the Consumer Price Index for June, Consumers’ Inflation Expectations Continue to Rise
Find: Rent Prices Continue to Rise per Consumer Price Index: ‘Not Likely’ to Slow Soon, Expert Says

In May, the index increased 8.6% for the 12 months, the largest 12-month increase since the period ending December 1981, which has rattled the markets further. Following that data, the Federal Reserve raised interest rates by three-quarters of a percentage point rate on June 16, the first time it has done so since 1994. The move was widely anticipated and came amid a market that has entered bear territory and inflation at a 41-year high.

Fed Chair Jerome Powell said in a press conference at the time that given the inflation which has risen notably since March, “a larger increase was warranted at today’s meeting,” adding that it is “an unusually large one.” He added that because of the May CPI data “we thought that we needed to go ahead so we did.”

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“We came to the view that we wanted to do more front-end loading. It was about the speed,” he said, as GOBankingRates reported.

Now, however, Morningstar.com notes that there is “increasing evidence that inflation appears to be peaking if it hasn’t already.”

So, what are the signs?

First, while the consensus estimates CPI to come in at elevated levels, according to FactSet, 8.8%, slightly higher than the 8.6% reading in May, this will be largely due to the price of oil, which started to drop in mid-June and has continued to fall into July, Morningstar reported.

In addition, experts will look at the core CPI, which excludes food and energy, to gauge the Fed’s next steps, Morningstar noted, adding that Core CPI for June is estimated to rise 5.7% year over year and 0.50% month over month, according to FactSet. That compares with May’s 6% year over year core CPI reading and 0.6% month over month.

“We’re back in risk aversion mode at the start of the week with equities sliding, tech getting crushed and the dollar reigning supreme,” Craig Erlam, Senior Market Analyst, U.K. & EMEA, OANDA, wrote in a note sent to GOBankingRates. “While the jobs report on Friday highlighted that the U.S. is faring better than the rest in the race to avoid a recession, the rest of the world is sinking under the weight of a cost-of-living crisis and higher interest rates. The U.S. inflation data midweek is a standout, as investors cross their fingers for signs of decelerating prices.”

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Another factor that inflation might be cooling off is that the June job report, released July 8, came stronger than anticipated, which tampered fears of a recession.

“The economy may be cooling off but hiring remains red hot. The tight labor market and worker shortage are key factors behind rising inflation, alongside wider macroeconomic and geopolitical concerns, and vacancies aren’t looking like slowing down any time soon,” James Neave, head of data science at Adzuna, told GOBankingRates. 

“Up and down the country, worker shortages are still causing bottlenecks in supply chains. Companies that can’t find the staff to meet demand will likely keep hiring, even as prices rise and with the Federal Reserve threatening further interest rate rises.”

Morningstar also points out to the Fed’s preferred gauge of inflation, the core Personal Consumption Expenditures (PCE) price index, Excluding Food and Energy, which stood at 4.7%, for May, down from 4.9% the prior month, and below expectations of a 4.8% increase.

Then, the prices on a range of commodities — oil and natural gas, wheat and corn, lumber and copper, among others — have fallen sharply in the past month. In addition, the housing market seems to have also cooled due to rising mortgage rates.

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Economy Roundup: Fears of an Economic Slowdown & Recession Felt Across Financial Sectors
Discover: Cleveland Fed May Back 75 Basis Point Interest Rate Hike in July

Finally, Morningstar says that “the 5-year TIPS breakeven indicator, which tracks the yields on Treasury Inflation-Protected Securities to measure expected inflation. The 5-year TIPS breakeven rate has fallen one full percentage point since March, reflecting diminished concerns about inflation over the next five years.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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