Gas station signboards display prices on August 6, 2023 in Bethesda, Maryland.

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Thursday’s consumer price index report It will likely show that the pace of price increases is slowing, but not enough to force the Federal Reserve to back down from its inflation battle.

If Wall Street’s consensus as gauged by Dow Jones is correct, a closely watched consumer price index would show a monthly increase of 0.2% for July and a 12-month rate of just 3.3%.

The latter number pales in comparison 8.5% annual rate The CPI was just shy of its highest level in more than 40 years, recorded a year earlier. Excluding food and energy, the monthly estimate is also 0.2%, although the 12-month rate is pegged at 4.8%.

If all of this sounds like the least bit of good news, it is. Several data points have indicated that inflationary pressures have eased significantly from 2022 levels.

But history has shown that inflation is stubborn and once high and strong, it can last longer than expected. And the current phase is still impacting consumers, as evidenced by the almost 19% increase in CPI in April 2020 from the low level during the early days of the COVID pandemic.

“We can feel confident that inflation is moving in the right direction,” said Mark Zandi, chief economist at Moody’s Analytics. “But I don’t think we should be overconfident.”

Zandi runs with the consensus CPI estimate and sees inflation easing, perhaps even meeting the Federal Reserve’s 2% annual target around this time in 2024.

For example, housing-related costs, which make up about one-third of the inflation index weighting, are declining. There are also signs that wage gains are waning. employment cost indexA key Fed inflation measure looked to rise to 4.6% in the second quarter, down from an all-time peak of 5.7% over the same period in 2022, according to a data set dating back to 2002.

But Zandi also sees danger signs: For example, health insurance costs are expected to start rising now that the statistical adjustment used by the Bureau of Labor Statistics is expiring. That adjustment has seen the health insurance component of the CPI decline by 24.9% from last year, which should now be reversed.

Furthermore, gas prices have soared this summer as the price of US crude oil has risen nearly 16% in July.

A gallon of regular unleaded now costs $3.82 on the national average, up 8% from the same time in July, or about 30 cents per gallon. according to AAA,

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Still, Zandi believes that, at least, recent trends should persuade the Federal Reserve to hold off on raising interest rates.

“If inflation stays on script, that’s enough to explain [rate-setting Federal Open Market Committee] Do not raise rates further, at least in aggregate,” he said. ”However, the ceiling for lowering rates is high, as inflation is not benign and is still above target. They will wait until they are absolutely sure that inflation will return to target before they start cutting rates.”

No ‘Mission Accomplished’ yet

former fed governor richard clarida Not sure the Fed should end it current rate hike cycleWhich started in March 2022 and has seen 11 growth of 5.25 percentage points.

Now the global economic advisor to asset management giant Pimco, Clarida said his former colleagues needed to send a message that he was continuing to fight inflation.

“They would like to keep their options open. Specifically, they don’t want to declare ‘mission accomplished’ too quickly,” he said during an interview on CNBC on Wednesday.scream on the street“But they also cannot be tone-deaf. They have to acknowledge that the data is improving.”

The Fed is really data dependent now and would like to keep options open: Former Fed Vice President

On a macro level, a Fed rate hike appears to do minimal harm. After declining in the first two quarters of 2022, GDP has not turned negative and is eyeing a 4.1% annual growth rate in the third quarter. According to the Atlanta Fed,

However, Americans are largely unsatisfied with the state of the economy and have chastised President Joe Biden with an anemic approval rating of just 39%. Latest CNBC All-America Economic Survey In July.

This is because the damage from high levels of inflation and rate hikes is often felt more in the micro-economy, such as small businesses and household debt levels.

The central bank’s key interest rate said, “Many people rely on both credit cards and home equity loans when starting a small business, and credit card interest rates are actually rising slightly faster than fed funds.” Are.” , said Patrick Reilly, co-founder of Uplink, a global credit assessment platform for small business lending. “Banks are also tightening credit norms.”

Reilly said rate hikes for small businesses and loan default rates typically rise together, perpetuating a credit crunch.

“We have now reached the point where the Fed is putting small businesses out of business,” he said. “When you curtail small business, what you’re really doing is you’re saying, ‘All those great ideas that are going to grow and turn into something, we’re going to have to settle for less of them. Going. And it’s not a fair playing field, is it?”

The good news is that if the data continues to cooperate, the Fed may at least take its foot off the monetary policy brake. Regional Chairmen John Williams of New York and Patrick Harker of Philadelphia Both commented this week It shows that they are entertaining holding off on rate hikes.

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