The CPI report came out Wednesday 10th of August to concur the price index and inflation numbers. Inflation remains elevated however they have been reduced from the historically high levels in July. The market reacted positively to the news on the speculation that the Federal Reserve might take a more dovish approach.
Consumer prices increased 8.5% from a year ago and a 40 year record level of 9.1% in June 2022. Statistics are according to the Labor Department Consumer Price Index. Gas prices reduced but rents and food costs continued to surge. Estimation by Bloomberg expected yearly inflation to fall to 8.7% however on a monthly basis, the consumer prices did not change, when taking into account the 1.3% rise in June 2022.
Excluding food and energy items, the prices of increased by 0.3% in July after a 0.7% rise in June.
Both S&P500 and Dow Jones Industrial Average rose higher in the anticipation of the Fed increasing rates by 0.5% next month instead of the 0.75% rise the past 2 months have seen.
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How come gas prices are going down?
The fear of a global recession reducing demand lead to a reduction of gas prices. On average prices fell 7.7% from the previous month however the prices are still up 44% annually.
Despite that, groceries increased by 1.3% from June and are up 13.1% annually. However with the recent reductions in prices of wheat plus with the lingering fear of a global recession, it is expected that food prices will go down.
There are some other events that send mixed signals in the market such as the war in Ukraine disrputing shipments of fertilizer or the news that ham prices have been generally decreasing.
How much have restaurant prices increased?
In contrast to the general forecast for food items to go lower, restaurant prices have instead increased. They are 7.6% increased annually and 0.7% monthly.
For example, a dinner for two in Palm Deserts, California ; increased from 180$ from 120$ one year ago. Prices for one entree can reach 40$ each.
Rent increased as well , 6.3% on the yearly and 0.4% on the monthly with owners looking to offset a surge in housing sale prices. Medical services also increased: 0.4% on the monthly and 5.1% on the yearly. New vehicle prices increased as well : 0.6 M , 10.4 Y
Clothing, airlines, used cars and hotels decreased however.
Airline: 27.7% Y , 7.8% M
Hotels : 2.8% M
Next interest rate hike ?
Jerome Powell – Federal reserve Chair – stated the central bank needs to have “clear and compelling” evidence that inflation is lowering before they could consider a more dove-ish approach. For the record, dove-ish Federal reserve is usually a bullish sign for the assets and crypto markets as the Fed then lowers interests rates, increasing the supply of the dollar bill and reducing demand. The current approach the Fed has had ever since November 2021 has been hawkish , in an effort to reduce the supply of the dollar on the market.
Some economists are divided on the topic whether or not the next interest hike will be 0.5% or 0.75% . The problem is the Fed can’t go too much overboard as that will affect the job market as well, and – as part of it’s dual mandate – the Fed also needs to keep unemployment lower than 4%. The current unemployment number is 3.5%
Consumer inflation expectations over the long term fell as well in July. Commodity prices are lowering and supply chain issues have lifted. Overall, this will lead to lower prices and lower inflation rates soon. Not to mention the increased supply of retailers which is leading to various discounts and offers for shoppers.
Barclay bank now modified it’s initial 6.1% estimate to 5.8% by the end of the year.