US Inflation Set To Cool; Talk of Dovish Fed Pivot Likely Premature

- July headline rate forecast at 8.7% (prev 8.9%)   

- Lower gasoline prices to drag headline lower  

- Core inflation set to rise to 6.1% (prev 5.9%)   

- Broad price pressures to remain persistent  

- Report due Wednesday at 12:30 GMT (08:30 EDT) 

 

By Peter Devlin

LiveSquawk News

@dev_peter

 

09 August 2022 | 15:00 GMT

 

US inflation is expected to have moderated in July after consumers finally found some relief from soaring petrol prices last month.  

 

Economists forecast a drop in annual inflation to 8.7% last month from 9.1% in June. Monthly consumer price growth is expected to have fallen to 0.2% in July, which would be the smallest advance since the start of 2021. 

 

While moderation in the overall gauge is seen as a welcome respite, the pace of inflationary pressures remains intense. And after a robust July payrolls report that included a larger-than-forecast pickup in hourly earnings, investors are looking to the latest inflation report for clues on the Federal Reserve’s policy path. 

 

“Even if inflation starts to come down, the Fed will likely want to keep financial conditions tight for a prolonged period to make sure price pressures do not emerge again,” said Dane Cekov, an analyst at Nordea.

 

Price pressures persist   

 

As falling petrol prices are expected to bring some relief on July inflation, analysts said they expect core price pressures to remain firm. Core inflation, which excludes volatile items such as food and energy, is expected to decrease to a monthly rate of 0.5% compared to 0.7% in June. The annual rate for core consumer price growth is projected to rise to 6.1% from 5.9%.   

 

Analysts at HSBC suggested that rental inflation remains an upside risk with regards to core inflation. “We forecast increases of 0.7% m/m for the owners' equivalent rent index and 0.8% m/m for the rent of primary residence index.” 

 

Additionally, economists said travel-related price categories, including airline fares and hotel accommodation, could be key. “The hotel lodging price index is often volatile,” HSBC explained. “We forecast a 1.0% m/m increase following a 3.3% m/m decline in June. Airline fares could be a potential downside risk, after the 66% surge in the price index for airfares from October 2021 through May 2022. In June, the airfares price index fell by a modest 1.8% m/m.” 

 

Torrid labour market tempers recession worries  

 

US job growth surged much more than expected in July, and the unemployment rate ticked lower, illustrating solid labour demand that has partially soothed recessionary worries. 

 

While the strong advance in payrolls and wages were welcome news for the US economy, the data was seen as a green light for the Fed, which is on an aggressive rate hike path as it tries to tame inflation. 

 

Analysts at TD Securities noted the latest nonfarm payrolls report reaffirms that any talk of dovish pivot by the Fed is premature. “We think that the NFP report supports the view that the Fed is not close to being done on the rate hiking cycle and much less close to ‘pivoting’ on policy.  

 

“Rather the report is likely to enhance the Fed's inclination to front-load interest rate hikes until the policy rate overshoots neutral by a good margin over the next few months.”  

 

With more than six weeks away to the September Fed meeting, Citi strategists wrote that the surprisingly strong jobs report could “make a 75 basis-point hike in September very likely and raise the potential for further super-sized increases.  

 

“Our base case remains for a 75bp hike in September, but we would not be too surprised by a 100bp hike if core inflation comes in stronger than expected.” 

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