E Economics

Latest Indicators Confirm That U.S. Inflation Peak YoY Is Behind Us

19 August, 2022

Despite several Fed members, such as Bullard, aren’t ready to say inflation reached a top, latest indicators confirm my view that CPI YoY peaked in June at 9.1%.

1. In July, CPI surprised downward

On a YoY basis, U.S. CPI decelerated in July by more than expected, reaching 8.5% YoY (v 8.7%e) and cooling from the 9.1% June advance that was the largest in four decades. On a MoM basis, headline CPI was flat, below the consensus estimate of 0.2%. It was the first downward surprise since August 2021 report. More interesting, unrounded, CPI decreased for the first time since May 2020. Another MoM drop in August, seems likely based on latest developments.

2. Gasoline prices have retraced significantly since mid-June

Last week, the average price of U.S. retail gasoline fell below $4 per gallon for the first time in months. On Monday, data showed retail gasoline prices have been falling for at least 63 days, exceeding the drop seen when pandemic-driven lockdowns crippled economic activity in early 2020. The last time prices plunged for a longer period was 2018.

3. Food prices growth should normalize downward in the coming months

Agricultural commodity prices also dropped sharply suggesting food prices could reach a top soon (due to lagging effects). Wheat prices, for example, have completely erased any “conflict premium” associated with the war in Ukraine. In the meantime, the price of other commodities such as corn or soybeans has moved rapidly downward.

4. U.S. auto prices may have reached a top

Latest data highlight that auto prices started falling amid weaker demand, coupled a normalization of chips shortage and global supply chain disruptions. As an example, Manheim reported “Wholesale used-vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) declined 3.6% from July in the first 15 days of August.” Manheim figures also pointed a drop in both June and July.

5. Leading indicators suggest that core CPI for goods also peaked on a YoY basis

In a context where inflation accelerated sharply and uncertainty about economic prospects gained traction, real personal consumption expenditures of goods have been under pressures since a few months while demand for services remained robust (post-Covid restrictions).

Such shifts in spending behavior, combined with over-ordering earlier this year, have left the people who manage supply chains with huge inventories. As result, retailers will be forced to implement discounts to liquidate their merchandises, resulting in downward prices’ pressure in the coming months.

6. Shelter growth is expected to ease soon

As I forecasted in January, shelter growth (YoY) is expected to reach a top soon (due to lagging effects). As I already noted last year, economists have observed that Fed measures to assess the dynamic of the rental market tend to be “sticky” relative to market-based rental costs and also lagged them during expansionary periods. In other words, the shelter component of the CPI (and also PCE price index) tends to lag market rents. More precisely, the CPI’s measure of rents for homeowners has typically lagged other measures of market rents by between nine and 12 months, according to a report from CoreLogic.

On the positive side, market rents data already show that, despite growth has remained elevated, it has eased since the beginning of the year. In addition, other indicators confirmed that the housing market is cooling with inventory and vaccancy rates rebounding.