It has been almost five months since the Federal Reserve turned its full attention and force of action toward fighting inflation. We may see if it’s having any material effect with the July inflation data released in the week ahead.
There are two versions of the inflation figures: wholesale inflation and consumer inflation. The consumer inflation is what gets all the attention.
It June, fueled by high gasoline and food prices, consumer inflation was 9.1% higher than a year earlier. It was the latest in a string of 40-year high records this year. Russia’s war in Ukraine has pushed up energy and food prices. And there is nothing the U.S. Federal Reserve can do about the war, and little it can directly do to bring down food and fuel costs.
The central bank’s tool to fight inflation is interest rates. Raising its short-term target interest rate is designed to soak up money, keeping it out of economic circulation and thus cooling down demand. Interest rates are a sponge in the economic ocean that was flooded with pandemic money. The Fed isn’t trying to drain the economy so much as sop up the cash. It can be a slow process.
July’s inflation reports should show price hikes are cooling off. Gasoline prices have been falling. That alone will help the headline inflation number. However, core inflation (excluding food and gas) could slightly rise compared with a year ago.
Some speculators believe the central bank may slow its rapid rate hikes in the months ahead. Perhaps the speed may slow, but not the direction. Several regional Fed leaders have tried to tamp down such talk. The Fed is “nowhere near” done raising rates and “going to continue to do what we need to do” to bring down inflation, said two of them recently.
The stock market rally in July shouldn’t be read as an indication of inflation easing this summer, nor the Federal Reserve about to reverse course. Instead, it’s a sign that investors believe those will be the conditions in early 2023.
Consumers are shopping and spending in the here-and-now. Investors aren’t.
While the Consumer Price Index may not be the Fed’s preferred inflation gauge, the enduring strength of price hikes in July would lend weight that the central bank is far from finished with hiking interest rates.
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