Inflation cooling down in the US remains a hot topic among stock market investors as Federal Reserve continues to fight a battle against rising prices in the US. The next set of US CPI data for September is scheduled to be released on October 13 and till then uncertainty abounds. This is how the US inflation rose and fell over the last few months – From 8.6% in May, US inflation rose to 9.1% in June and later fell to 8.5% in July before settling at 8.3% in August 2022.
Market-implied inflation expectations for the subsequent two years have fallen from as high as 4.9% in March to roughly 2.3%, suggesting that traders believe price pressures would decrease closer to the Fed’s objective, theoretically paving the way for a dovish policy turn.
However, according to Mueller-Glissmann of Goldman, those hopes are too modest. Furthermore, it wouldn’t be the first time expectations of peak inflation have been dashed. Many in the market were caught off guard when the US consumer price index increased by 8.3% more than anticipated in August compared to a year earlier. Core PCE data, the preferred inflation indicator of the Fed, also topped expectations last week.
The inflation numbers in August were not as per expectations thus leading Fed to remain aggressive in its approach to dealing with inflation. Overall, Fed has hiked rates by 300 basis points in 2022 and as per José Torres, Senior Economist at Interactive Brokers inflation could be slowing down as demand is seen to be falling.
Overall, demand in the economy is slowing while production is still facing many challenges. Unfilled orders continue to rise as the industrial sector continues to face supply chain disruptions and shortages in materials and in labor. Rising inventories and declining new orders point to declining demand, as buyers stop ordering and sellers can’t move goods fast enough.
The August durable goods report is negative for 3rd quarter GDP prospects but mildly positive for inflation. Less demand means businesses don’t have as many customers to sell to, which leads to softening price pressures.
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Rising inventories also point to businesses holding too many goods that they’d like to sell. Again, leading to price pressures softening as they increasingly reach a level of inventory that is uncomfortable and leads to falling prices as a strategy to lure customers in and rid themselves of excess inventory.
We’re seeing evidence of the inputs to durable goods, and commodities, falling across the board. Whether it’s crude oil, natural gas, copper, metals, or wheat, they’re all significantly off their highs because inflation is slowing down as demand slows down.
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A continued slowdown is needed for the Fed to reach its 2 percent inflation target and take its foot off the brakes. Unfortunately, the bulk of the inflationary pressure is coming from services and not goods, while wages and rents remain the primary drivers.