Easing inflationary pressures are giving the economy some breathing room, for now

A shopping cart is seen in 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, then July’s data should provide signs that there is at least some relief in the pipeline.

Prices held steady during the month, as evidenced by items tracked by the Bureau of Labor Statistics for its consumer price index. It was the first time the aggregate measure failed to show a month-over-month increase since May 2020, when the widely followed index showed a slight decline.

Just a month ago, the CPI posted its fastest 12-month gain since November 1982, following a trend that contributed to shrinking economic growth in the first half of the year, sparking rumors of a recession. .

But with at least the short-term trend indicating that the rate of price increases is slowing, economic optimism is picking up.

No recession, yet

“The whole recession narrative really needs to be put aside for now,” said Aneta Markowska, chief economist at Jefferies. “I think it’s going to shift to a stronger narrative for longer, which is really supported by a reversal in inflation.”

Markowska, whose forecast this year proved accurate, predicts solid near-term growth, including a 3% growth rate in the third quarter. The Atlanta Federal Reserve’s GDPNow gauge, which tracks real-time economic data, pointed to a growth rate of 2.5% in an update on Wednesday, up 1.1 percentage points from to the last of August 4.

However, Markowska also expects the pressures to intensify in 2023, with a recession likely at the end of the year.

Indeed, there was a bit for both arguments in the CPI report.

Most of the moderation in inflation is due to lower 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%.

Rises in the cost of transport services have also subsided, with airline fares falling 7.8% to reverse a trend that has seen tickets rise 27.7% over the past year.

But there were few other signs of lower inflation in the report, with food costs particularly high. The food index has indeed increased by 1.1% over the month, and its rate of 10.9% over the last 12 months is the highest since May 1979.

That’s causing concern at places like City Harvest, which helps feed needy New Yorkers who have been hit particularly hard by the price spike that began last year.

“We’re seeing a lot more kids going into pantries,” said Jilly Stephens, the organization’s CEO. “Food insecurity was intractable even before the pandemic hit. Now we see even more people turning to food pantries due to rising prices.”

Stephens said the number of children seeking food aid roughly doubled a year after the Covid pandemic hit, and the organization is struggling to keep up.

“We are always optimistic, because we are supported by incredibly generous New Yorkers,” she said.

People keep spending

Despite soaring prices, consumers have shown resilience, continuing to spend even with inflation-adjusted wages that have contracted 3% over the past year.

Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending was at a healthy pace, rising about 10.5% over the past the past year, although inflation influences behavior.

“When you start looking at specific categories, there have been a lot of shifts in spending and therefore some categories are more affected by inflation than others,” he said. “People are delaying spending on discretionary items.”

For example, he said department store spending fell 2.4% over the past year, while discount store spending increased 17%. Amusement park spending was down 18%, but movie theaters were up 92%. Some of these numbers are influenced by rising prices, but they usually also reflect the level of transactions.

As inflation declines, Silver expects discretionary spending to increase.

“We believe there will be a spike later in the year that will create an upward slope in spending in key categories where the consumer has been delaying and postponing spending,” he said. “Consumers can get a holiday gift of some relief on food prices.”

Meanwhile, the year-on-year inflation rate is still 8.5%. That’s right next to the most aggressive rise in 40 years and a “worrying rate,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

At the center of concerns about global growth is the Federal Reserve and fears that its interest rate hikes aimed at controlling inflation will slow the economy so much that it slips into recession.

Following Wednesday’s report, traders changed their bets to expect the Fed to hike half a percentage point in September, rather than the previous trend towards 0.75 percentage points, a move that, according to Rieder, could be wrong.

“The persistence of still strong inflation data seen today, when combined with last week’s strong labor market data, and perhaps in particular still strong wage gains, places policymakers in the Fed firmly on course for continued aggressive tightening,” he wrote.

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