Despite a 0,2% climb in US inflation, markets see the silver lining of the situation.
Inflation is back on the rise in the United States, though the 0,2% monthly climb in July surprised no one in the finance sector. Indeed, July’s increase in consumer prices was lower than expected by analysts and experts.
Inflation has been a thorn in the US side for almost two years. At their July meeting, the Federal Reserve increased interest rates for the 11th consecutive time since March 2022. The fastest monetary tightening in the Fed’s history.
Despite the Fed’s efforts, inflation continues to hamper economic growth. In July, it climbed to 3,2% from June’s 3% reading.
The housing market is what drives most of the US’s inflation, amounting to a third of the overall increase. Rents increased by 0,4% in July while residential investment dropped.
On the other hand, fuel prices continue to be extremely low, with a -19,9% drop year-to-date. Electricity prices, though, increased by 3% in July.
While headline consumer prices increased, core inflation actually declined in July compared to June. Core inflation measures the price level of less volatile consumer goods. Normally, it excludes food and energy prices from its measurement.
Core inflation dropped to 4,7% in July compared to 4,8% in June. The Federal Reserve usually uses core inflation as a measure to decide monetary policy.
The uncertain future of interest rates
The Federal Reserve has not confirmed any hike, pause or cut for its upcoming September meeting. The markets widely expect (or hope) the Federal Reserve will stop raising interest rates.
Currently, US interest rates are at 5,5%, putting pressure on banks and businesses alike. Nevertheless, the American economy appears very resilient to rate hikes, with low unemployment levels and good consumer spending.
Eugenio Aleman at Raymond James expects the Federal Reserve to continue its hike policy. "In order for this to change, there would need to be a strong decoupling between headline inflation and core inflation but for that, we need a big slowdown in shelter costs,” Aleman said, “which we have been expecting for several months and has still failed to show up.”
Other analysts agreed, citing the better-than-expected GDP measurement for the second quarter of 2023. The US economy exceeded expectations by growing 2,4%, much more than the 1,8% predicted.
Good economic recovery and high inflation are usually the two main indicators of upcoming rate hikes. The Federal Reserve inflation target is 2%, appearing very far in the future with the current levels.
Will the markets stay bullish even with a September hike?
