US inflation: good news but not good enough

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Key takeaways

The US Federal Reserve are rapidly hiking interest rates to bring down US inflation. We’ve had a string of good news on that front which has helped equity markets around the world deliver strong performance after what was a dreadful first half year.

US inflation falls…

US consumer price inflation fell last week, and by more than expected – quite a contrast with the pattern over the last year or so. Producer price and import price inflation did likewise. And the closely watched Atlanta Fed Wage Tracker stabilised on a smoothed basis but fell in year-on-year terms sharply on the single month measure. With oil and agriculture prices down 20% from their peaks – US gasoline prices are down a full dollar a gallon since their peak in June and could fall further. Goods price inflation is easing across the board in the US – this is all good news.

…but persistent drivers are still too high

The bad news is that persistent sources of inflation are still too high. Rental inflation is high and rising and even if wage inflation has come off the boil it’s still way too elevated. The next Fed meeting is not until the 21 September and this week’s minutes will be closely watched for any signs that they’ll slow the pace of tightening to 50 bps having delivered 75 bps moves in the last two meetings. My guess is that optimists will be disappointed. The key point is not so much about the next few months but the Fed’s view that rates will have to continue rising into 2023. By contrast the market is pricing in rates cuts.

Economic round-up

Elsewhere, we’ve seen weak economic data out of China where the woes of the property sector and residual covid problems are weighing on the economy. Back in Europe, the cost-of-living crisis continues to worry everyone, and governments are tackling the problem in a variety of ways.

In the UK we have the distraction of a Tory leadership contest that will also select the next Prime Minister. The leader of the opposition has returned from holiday to announce a plan to cancel the next hike in energy prices for consumers and raise the money by taxing energy companies. The added benefit is that inflation would fall, saving the government billions of payments on indexed linked gilts. Apparently 7 out of 10 Tory voters approve of the plan, yet party members look set to elect Liz Truss who opposes further windfall taxes and has announced no specific plans to help consumers.

All in all, rising interest rates and the prospect of recession are a worrying backdrop for risk assets like equities. I’m pleasantly surprised by the strength of equities of late, but I feel that it’s temporary and that equites are set for tough times in the months ahead.

15 August 2022

Steven Bell

Chief Economist, EMEA

Key topics

Multi-Asset

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US inflation falls…

…but persistent drivers are still too high

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