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Not bad but not enough to get the Fed moving

Inflation in July confirmed the moderate trend from the 2022 experience. However, continued improvement is not enough to move the Fed from its fight against inflation. Chairman Jerome Powell has said repeatedly that he and his policymakers will stick to their current policy path until inflation measures rest securely around the Fed’s target rate of 2% per year. What emerges from the latest news is still far from that goal. Many in Washington and Wall Street would like the Fed to soften, to lower interest rates and otherwise ease monetary policy. They found reason in every bit of data to justify such a monetary move, but that is not what the data says or what the Fed said.

A look at the Labor Department’s latest consumer price report can inspire satisfaction. Overall, the Consumer Price Index (CPI) in July increased by 0.2% from its level in June, an annualized rate of 2.4%. Over the past 12 months, prices have increased, according to this report, by about 3.2%. These rates are a significant improvement over last year’s experience but still far from the Fed’s 2% target, and less securely in that range, as the Fed would like. The relatively good news may prompt policymakers to pause in pushing interest rates higher, but that cannot justify the policy reversal that many in government and in the investment community have long been in.

What makes the Fed less likely to back down in its anti-inflationary efforts are some of the details behind these inflation totals. The key, as always, is what statisticians refer to as the “core” measure of inflation, which is higher prices without the influence of the often highly volatile food and energy components. By this metric, the Labor Department is tracking rates rising 4.7% over the past 12 months, more than double the Fed’s target rate. Sure, the monthly change through June was a more modest 2.4% annualized earnings rate (0.2% for the month), but much of that relative moderation reflected a sharp 1.3% decline in used car and truck prices. Although this is a continuation of the higher price adjustment from a year or so ago, it is nonetheless unsustainable. Were it not for the decline in this component, the core inflation rate would have approached an annualized rate of 3.0% in July. Even more important from the Fed’s point of view is the July 5% annual increase in shelter prices.

If these observations alone announce that inflation is not gone yet, there is also a worrying energy picture. Energy prices have always been volatile, especially in the past few months. The energy component of the CPI in May fell 3.6%, at an annualized rate of 35.6%. Consumer energy prices then rose in June at an annual rate of 7.4% only to settle at a moderate annual rate of 1.2% for the advance in July. But commodity markets, not part of the CPI, are raising a warning about consumer energy prices in the coming months. Since the end of June, unleaded gasoline futures are up nearly 29% and crude oil futures are up nearly 25%. Unless these pressures suddenly reverse, they will trickle down to consumer prices in August and September, adding rather than adjusting a measure of overall consumer price inflation.

Insight also comes from the Labor Department’s report on weekly and hourly earnings. He notes that real hourly earnings rose about 0.3% in July. This means nominal gains much faster than the rate of inflation, near an annual rate of 6%. This may be good news for working men and women, but it is a major concern among federal policymakers. They worry that past inflation has started what economists call a wage-price spiral. In it, expectations of a rising cost of living prompt workers to demand wage gains to adjust, which management grants and then pushes prices higher to protect the bottom line. Should such a vortex occur, inflation would assume a life of its own, an internally generated momentum. The latest figures do not confirm the existence of such a downward spiral, but they do fuel Fed fears.

With this potential influence on the minds of policymakers, including Jerome Powell, and these other considerations, it is doubtful that the Fed will abandon its anti-inflationary efforts anytime soon, even if the Fed does indulge in another pause in the pattern. of an interest rate increase.

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