The war against inflation is a long way away from being won

Don’t break out the party hats just yet: Despite recent signs that inflation is cooling, the struggle to bring down the meteoric price increases of the past three years is far from over.

Financial markets got a boost from two reports last week that showed growth in both the prices consumers paid at checkout and the prices businesses paid for their products. used hit for many years.

But the data points show relative rates of change, without capturing the overall surge that led to the highest level of inflation in more than 40 years. In addition, there are still troubling economic undercurrents, such as rising fuel prices and a tight housing market, that could cause problems ahead.

“No victory laps. No mission accomplished. Our work is not done,” Jared Bernstein, chair of the White House’s Council of Economic Advisers, said during a CNBC “Squawk Box” interview Monday morning. “But we’re very happy to see some breathing room for American households.”

The consumer price index, a widely followed gauge that tracks many goods and services across many sectors, rose just 0.2% in June, taking the annual rate to 3.1%. That latter figure was down from a 9.1% peak a year ago, which was the highest in nearly 41 years, and was the lowest since March 2021.

Also last week, the Labor Department reported that the producer price index rose just 0.1% in June and was the same amount year-over-year. The 12-month PPI reading rose at an annual rate of 11.6% in March 2022, the highest reading since November 2010.

The sharp drop in both readings raised hopes that, with inflation approaching the Federal Reserve’s 2% target, the central bank could ease interest rate hikes and the tight monetary policy it has been implementing since then. in early 2022.

“Cooling inflation. Slowing but still positive job growth. These are the things soft landings are made of,” Citigroup economist Andrew Hollenhorst said in a note. “Near-term price inflation may do little to oppose Fed official hikes and market hopes that a favorable outcome will be achieved.”

However, Citi’s economic team is concerned that the ideal conditions, which include strong consumer spending, stronger supply chains and the reduction in prices of primary areas such as energy and vehicles, may not last.

“Tight labor markets, high wages, and upside risks to housing and other services inflation mean we do not share this optimism,” added Hollenhorst. “Without a tightening of fiscal conditions, inflation could pick up again in early 2024.”

For their part, Fed officials have indicated they see their benchmark rate rising by at least half a percentage point by the end of the year. Chairman Jerome Powell has repeatedly warned against reading more than a few months of positive inflation data, noting that history shows such moves can be false heads.

There is certainly reason for caution if not outright skepticism about where inflation is headed.

The easiest thing to point out is that the CPI will be in a sharp decline when including all items, but the step is less impressive when excluding volatile food and energy items. price. Energy has fallen nearly 17% over the past year and could bounce back soon.

So-called core inflation rose 0.2% in June and is tracking at a 4.8% annual rate, higher than the Fed wants.

Housing is another focus.

Central to the Fed’s expectation that inflation will ease is the belief that rental costs will begin to subside after home prices rose in the early days of the Covid pandemic. Housing costs, however, rose 0.4% in June and are now 7.8% higher than a year ago. That was just the highest hit earlier this year and is still close to the highest since the early 1980s.

When looking at prices through a long lens, the CPI is still up about 18% from where it was three years ago, the recent slowdown hasn’t stopped.

There are other nettlesome points too.

The cost of health insurance decreased almost 25% last year, due in large part to an unfavorable change applied by the Bureau of Labor Statistics to the category. The adjustment will expire in a few months, meaning that the category, although a small contributor to the CPI weighting, will be more significant.

Fed officials have vowed not to be complacent about inflation, repeatedly expressing concern about the impact on low-income families and workers.

Small businesses have also been hit hard by rising prices and the higher interest rates used by the Fed in its efforts to restore price stability.

“Inflation has certainly changed the cost structure, in some cases, perhaps permanently for many small businesses,” said David Cody, co-founder and co-CEO of NEWITY, which started during the Covid as a conduit for Paycheck Protection Program loans and is now focused on providing loan solutions for small businesses.

“Not only do you have headwinds for growth as things slow, which is what is happening, but you also have high absolute rates and price pressure on inputs,” he added.

Coty said the current environment is extremely challenging for small business financing and he doesn’t expect to see any benefits from low inflation for a while.

“Things need to move to change the landscape in a material way for small businesses considering the type of all the headwinds that have been created in the last two years, including the pandemic,” said he.

To be sure, there is also plenty of evidence showing inflation heading in the right direction.

Alleviating supply chain problems is probably the biggest positive factor. The New York Fed gauge of global supply chain pressures is near its lowest level since 2008.

Also, as consumers eat through excess savings collected from trillions in fiscal and monetary stimulus, demand will likely decrease and put pressure on some key categories. Those trends could push the Fed to ease its foot off the brake.

“Underlying growth in both core goods and services inflation won’t prevent the Fed from hiking rates later this month but, if the trend continues, it should convince the Fed to fire after and , finally, will start cutting rates again in the first half of next year,” wrote Paul Ashworth, chief North American economist for Capital Economics.

The Commerce Department on Tuesday will provide a better look at the impact of inflation on spending.

Retail sales are expected to show growth of 0.5% in June, an important number because it is not adjusted for inflation. If spending for the month actually exceeds the level of price increases, that in itself would be inflationary.

“With the Fed temporarily halting rate hikes, the U.S. economy has proven resilient with continued consumer spending, but continuing that trend. [at] the current rate may create a high new normal level of spending,” said Kavan Choksi, managing director of KC Consulting.

“The reality is that the current inflation rate still has a negative impact on consumers,” he added. “So, although we are on the right track, we still have a long way to go.”