US: Inflation slows more than forecast as gas price drops

US inflation slowed more than expected in July, reflecting low energy prices. The consumer price index increased by 8.5% compared to the previous year, increasing by 9.1%, cooling off from its 40-year high in June. Prices did not change compared to the previous month. Economists surveyed by Bloomberg had predicted an overall CPI increase of 0.2% from a month ago and 8.7% year-on-year. The drop in gasoline offset increases in food and shelter costs. The lower-than-expected data may ease some pressure for the Fed to continue raising interest rates aggressively.

If we look at the sub-items; The core CPI, which excludes the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago. Core CPI was expected to increase 0.5% compared to June and 6.1% compared to a year ago. The gasoline index fell 7.7% in July, offsetting the increases in the food and shelter indices, causing the all items index to remain unchanged throughout the month. While the gasoline and natural gas indices fell, the energy index fell 4.6% month on month, but the electricity index increased. The food index continued to increase by 1.1%. Housing, medical care, motor vehicle insurance, household goods and operations, new vehicles and entertainment were among the higher indices during the month. There were some indexes that fell in July, including airline fares, used cars and trucks, communications and clothing.

The energy index increased by 32.9% in the 12-month period ending July, a smaller increase than the 41.6% increase in the period ending June. The food index rose 10.9% year-on-year, the biggest 12-month increase since the period ended in May 1979.

It seems positive that the increase in service items lost pace compared to the previous month. On the other hand, rent inflation (OER) and housing-related items are on the rise and service-driven inflation continues to remain high. Of course, these items are closely related to the Fed as they are sensitive to interest rates and are the places where the first dimension of the tightening should be seen and price increases should be cut. Goods inflation is decelerating as expected. In this way, the headline inflation decrease will be realized faster due to energy prices. However, we do not expect the service to lose the same momentum yet and the requirement for higher interest rates will continue.

If we look at the Fed’s point of view; While the drop in gas prices is good news, living costs are still painfully high, forcing many to load up on their credit cards and save money. After last week’s data showed strong labor demand and stronger wage growth, a further slowdown in inflation may somewhat lessen the Fed’s urgency to extend excessive rate hikes. But the Fed may step back from the band, not from a rate hike or balance sheet reduction. Excluding the headline, core inflation, which is 5.9%, is almost 3 times the 2% target inflation rate and there is still a long way to go. Terminal pricing makes it more likely, after the data, that a softer rate hike might occur in September. In the perspective of 2023, it is still expected that the Fed may start lowering interest rates from the middle of the year. It will be determined whether it is in stagflation, recession or will be.

Kaynak: Tera Yatırım- Enver Erkan

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