Chart Content: Measures of inflation and components of the consumer price index (CPI).
Chart Significance: U.S. headline consumer prices eased to a lower than expected 8.5% year over year in July, from a four decade high of 9.1% in June. July headline consumer prices were flat month over month amid lower gasoline prices. July core consumer prices rose 0.3% month over month and remained unchanged at 5.9% year over year. The core reading strips out volatile food and energy prices.
Potential Forward-Looking Implications: June’s 9.1% CPI reading represents what many economists expect to be the peak of the current inflationary period, capturing the impact of surging goods inflation caused by excess pent-up demand against a backdrop of strong fiscal stimulus during the height of the COVID pandemic and soaring food and energy prices following Russia’s invasion of Ukraine earlier this year. While we expect continued moderation in headline CPI, we anticipate inflation to remain elevated throughout 2022 and into 2023 in part from sticky services components like shelter. Equity market participation may prove a good hedge over this timeframe.
Chart Content: Measures of consumer price inflation, producer price inflation, & manufacturing and services input prices paid.
Chart Significance: The Producer Price Index, which captures the prices paid to U.S. producers of goods and services, declined in July as did manufacturing and services prices paid according to the latest ISM Manufacturing and Services Purchasing Managers’ Indices. These gauges, along with the recent decline in commodity prices and shipping costs, corroborate the signal from July’s CPI release indicating that inflationary pressures are moderating.
Potential Forward-Looking Implications: Intense price pressures have been weighing down consumer sentiment and households’ real incomes, depressing their purchasing power. However, as producer and input prices decelerate, the inflationary pressure throughout the production pipeline eases, laying the foundation for continued moderation in consumer prices in the months ahead. This dynamic may likely cause consumer sentiment to improve from currently depressed levels, pushing real wage growth into positive territory and supporting near-term consumption, boosting our conviction in equity market participation.
Chart Content: Measures of one-year, three-year, and five-year ahead inflation expectations.
Chart Significance: One-year ahead inflation expectations eased in July according to the New York Federal Reserve’s Survey of Consumer Expectations and the University of Michigan’s Survey of Consumers. In fact, both have peaked and now infer an average one-year inflation expectation of 5.7%. Three-year ahead inflation expectations have fallen sharply from a peak of 3.9% in May to 3.2% in July. Five-year ahead inflation expectations have remained in a narrow range of 2.9% - 3.1% for the past 12 months.
Potential Forward-Looking Implications: Inflation expectations matter because prices end up reflecting, in part, what people expect them to be. Short term inflation expectations appear to have peaked this Spring and are receding while long term inflation expectations remain stable and well anchored. We view this dynamic as a sign of the market’s confidence in the Federal Reserve and confirmation that inflation has not become entrenched in the economy.
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.
All data is sourced from Bloomberg, through the release of monthly figures from the U.S. Bureau of Labor Statistics or from the Federal Reserve and any of its affiliated regional locations.