A shopping cart is seen at a supermarket as inflation hit consumer prices in Manhattan, New York, U.S., June 10, 2022.
Andrew Kelly | Reuters
If inflation has been the biggest threat to US economic growth, July’s data should provide signs that at least some relief is on the way.
Prices were flat for the month according to the items the Bureau of Labor Statistics tracks in its consumer price index. It was the first time the aggregate measure had not posted a month-on-month increase since May 2020, when the widely followed index showed a modest decline.
Just a month ago, the CPI posted its fastest 12-month gain since November 1982, continuing a trend that helped slow economic growth in the first half of the year, sparking talk of a recession .
But with at least the near-term trend indicating that the pace of price increases is slowing, economic optimism is being encouraged.
No recession, for now
“The whole recession narrative needs to be shelved for now,” said Aneta Markowska, chief economist at Jefferies. “I think it’s going to shift to a stronger longer-term narrative, which is really supported by a reversal of inflation.”
Markowska, whose forecasts this year have been spot on, sees solid near-term growth, including a 3% growth rate in the third quarter. The Atlanta Federal Reserve PIBNow indicatorwhich tracks economic data in real time, reported a growth rate of 2.5 percent in an update on Wednesday, up 1.1 percentage points from the last one on Aug. 4.
However, Markowska also expects pressures to intensify in 2023, with a recession likely later in the year.
In fact, there was a bit for both arguments the CPI report.
Most of the moderation in inflation came from falling energy prices. Gasoline fell 7.7%, the biggest monthly drop since April 2020. Fuel oil fell 11% as energy-related commodity prices fell 7.6 %.
Cost increases for transport services also came off the boil, with airfares falling 7.8% to reverse a trend that has seen fares rise 27.7% over the past year .
But there were few other signs of falling inflation in the report, with food costs particularly high. The food index actually rose 1.1% for the month, and its 10.9% pace over the past 12 months is the highest since May 1979.
That’s causing concerns for places like City Harvest, which helps feed needy New Yorkers who have been particularly hard hit by price increases that began last year.
“We’re seeing a lot more kids going into food pantries,” said Jilly Stephens, the organization’s CEO. “Food insecurity had been intractable even before the pandemic hit. Now we see even more people turning to food pantries because of rising prices.”
Stephens said the number of children asking for food assistance doubled about a year after the Covid pandemic, and the organization is struggling to keep up.
“We are always optimistic, because we have the support of incredibly generous New Yorkers,” he said.
People keep spending
Despite rising prices, consumers have been resilient and continued to spend even with inflation-adjusted wages contracting 3% over the past year.
Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending is at a healthy pace, rising about 10.5% over the last year, although inflation is influencing behaviour.
“When you start looking at specific categories, there have been a lot of changes in spending, and as a result, some categories are hit harder than others by inflation,” he said. “People are delaying their spending on discretionary items.”
For example, he said spending at department stores has fallen 2.4% over the past year, while spending at discount stores has risen 17%. Theme park spending is down 18%, but changing rooms are up 92%. Some of these numbers are influenced by rising prices, but generally also reflect the level of transactions.
As inflation eases, Silver expects discretionary spending to pick up.
“We believe there will be a pick-up later in the year that will create an upward slope for spending in key categories where the consumer has been delaying and postponing spending,” he said. “Consumers may receive a holiday gift of some relief in food prices.”
Meanwhile, the year-on-year inflation rate remains at 8.5%. That’s right up there with the most aggressive rise in 40 years and a “worryingly high rate,” said Rick Rieder, chief investment officer for global fixed income at asset management giant BlackRock.
At the center of concerns about global growth is the Federal Reserve, and that’s worrying his interest rate hikes aimed at controlling inflation will slow the economy down so much that it will fall into recession.
After Wednesday’s report, traders shifted their bets to expect the Fed to hike just half a percentage point in September, instead of the previous trend of 0.75 percentage points, a move Rieder said could be wrong
“The persistence of still-solid inflation data witnessed today, combined with last week’s strong labor market data, and perhaps especially still-solid wage gains, places Fed policymakers firmly on the path to the continuation of aggressive tightening,” he wrote.