US inflation rose for the first time since June 2022 in July year on year, as expected, driven by house prices, but is expected to resume its downward trajectory in the coming months .
Inflation settled in July at 3.2% year on year, against 3% last month, according to the consumer price index published Thursday by the Department of Labor. Analysts, however, expected a slightly stronger rebound, to 3.3%, according to Market Watch consensus. And over one month, inflation is stable, at 0.2%, as expected. “The housing index was by far the main contributor […]representing more than 90% of the increase “over one month, details the Department of Labor, which adds that the prices of car insurance also contributed.
A positive signal, however: underlying inflation, which excludes energy and food prices, continued to slow over one year, to 4.7% against 4.8%, and remained stable over one month, at 0.2%. This measure is considered by economists as a more relevant signal on the direction that inflation is taking.
“Underlying prices are moving in the right direction,” notes Rubeela Farooqi, economist for High Frequency Economics, in a note.
This is, she underlines, “good news” for the officials of the American central bank, the Fed, on the front line in the fight against inflation, which could thus stop raising its rates, but maintain a “restrictive policy for some time to bring prices back towards the target” of 2.0% over one year.
The Fed favors another measure of inflation, the PCE index, whose data for July will be published on August 31st.
“Compelling Evidence”
The New York Stock Exchange opened higher on Thursday, rebounding from two sessions of declines, welcoming the fact that inflation did not beat expectations. These figures show “that our economy remains strong. Annual inflation has fallen by around two-thirds since last summer,” President Joe Biden, who is traveling to the southwestern United States to tout his economic and industrial policy, said in a statement.
The pace of price increases has indeed slowed significantly from the 9.1% year-on-year peak that was recorded in June 2022, the highest inflation since the early 1980s. And July inflation offers “new convincing evidence that inflationary pressures are easing,” analyzes Lydia Boussour, economist for EY-Parthenon. “We have clearly passed the peak of inflation on the housing front […]. Real estate disinflation will accelerate in the coming months,” she explains.
Are you done raising rates?
The Fed has, since March 2022, raised its rates 11 times, to increase the cost of credit and discourage consumption and investment. Its main key rate is now in a range of 5.25 to 5.5%. And opinions differ among its officials on whether or not to continue raising rates at the next meeting, on September 19 and 20.
Because the risk is to press too hard on the brake and thus cause a recession. However, this scenario seems to be avoidable, whereas it seemed inevitable a few months ago. A sharp economic slowdown is nevertheless expected at the end of 2023 and the beginning of 2024. “We believe that the Fed has finished raising its rates in this tightening cycle, but will not lower its rates until the beginning of next year”, thus anticipates Ryan Sweet, an economist for Oxford Economics.
And, at a time when the main economies are fighting against inflation, China entered deflation in July, weighed down by sluggish domestic consumption which complicates the economic recovery.
