Bloomberg News reports, ‘Inflation Fever’ Is Finally Breaking — But Central Banks Won’t Stop Hiking Rates:
Global inflation is finally coming off the boil, even if it’s set to remain far too hot for the liking of the world’s central bankers.
As [global] economic growth slows, prices for key raw materials — from oil to copper and wheat — have cooled in recent weeks, taking pressure off the cost of manufactured goods and food. And it’s getting cheaper to move those things around, as supply chains slowly recover from the pandemic.
After the worst price shock in decades, the speed at which relief arrives will vary, with Europe in particular still struggling. But for the world as a whole, analysts at JPMorgan Chase & Co. estimate that consumer-price inflation will fall to 5.1% in the second half of this year — roughly half of what it was in the six months through June.
“The inflation fever is breaking,” says Bruce Kasman, the bank’s chief economist.
That doesn’t mean an early return to the subdued inflation that much of the world enjoyed before the twin shocks of Covid-19 [global pandemic] and the war in Ukraine — or the end of monetary tightening anytime soon.
Fed’s Still Hiking
Rents and labor-intensive services are likely to keep getting more expensive, with job markets tight and wages on the rise. And there are broader forces at work, from slowing globalization to lackluster growth in the labor force, that may keep price pressures bubbling.
The major global central banks, which failed to see the pandemic price shock coming, are set to press ahead with interest-rate increases even as headline inflation tops out. The Federal Reserve, European Central Bank and Bank of England are all expected to hike rates again in September.
Fed Chair Jerome Powell left the door open to another jumbo 75 basis-point increase next month, telling fellow central bankers in Jackson Hole on Friday that a recent ebbing of US inflation “falls far short” of what policy makers want to see.
Some central banks that were quicker off the mark than the Fed to raise rates may take advantage of cooling price pressures to pause their tightening moves.
[T]he soaring cost of living has left politicians as well as central bankers feeling the heat — especially in Europe, where natural gas prices more than seven times higher than a year ago have triggered an energy emergency.
Inflation in the euro area is forecast to accelerate beyond July’s record 8.9% and Citigroup Inc. predicts that it could exceed 18% in the UK, in part because a cap on energy bills just got lifted. All kinds of once-unlikely proposals, from nationalization to power rationing, have been floated to address the crisis.
The US, by contrast, will experience the fastest slide in inflation among developed economies, thanks in part to the strength of the dollar, the JPMorgan economists say.
[T]the recent decline in several important commodity markets should help dampen prices across the global economy:
- Benchmark crude oil futures have fallen about 20% since early June
- Prices for metals, lumber and memory chips have declined from their highs
- A United Nations index of food costs plunged almost 9% in July, the most since 2008
Much of this appears to stem from a slackening in demand. That’s partly because consumers are shifting away from the unusual shopping habits that emerged during pandemic lockdowns, when people spent less on services like hotel rooms or gym memberships, and more on goods such as exercise bikes and home computers. Goods inflation “is going to come off a lot,” says Jan Hatzius, chief economist at Goldman Sachs Group Inc.
The turnaround in commodity prices also reflects the fact that household budgets are increasingly stretched — and economies are slowing worldwide.
Most of Europe is expected to fall into recession in the coming months as the energy crisis takes a toll over the winter. China remains hobbled by its Covid Zero policy and a depressed property market, with spillovers for commodity prices. In the US, Fed rate hikes have undercut the once-ebullient housing market and turned high-tech companies cautious.
Even with recession risks rising, bond investors don’t see central banks letting up in the near future … “Inflation is truly the issue and it remains well above the targets of central banks,” said John Flahive, head of fixed-income investments at BNY Mellon Wealth Management. “They do not want to make the mistake of lowering rates and watching inflation go back up.’’
‘Seen the Worst’
The easing of logistical logjams is also contributing to lower prices. The New York Fed’s index of global supply-chain pressure has dropped to the lowest level since early 2021. Short-term shipping rates are falling, transit times across oceans are shortening, and companies are even starting to moan about bloated inventories.
“We were getting about a 65% service level from our strategic suppliers. That’s back up to a plus 90% now,” Randy Breaux, the president of Motion Industries Inc., an Alabama-based provider of industrial components, told a conference this month. “We really think that we’ve seen the worst of the supply-chain issues.”
If that’s the case, the Fed may not have to raise rates as much as feared to reduce demand and rein in inflation, according to Apollo Management chief economist Torsten Slok.
Still, even if goods prices slow, there’s a risk that the post-lockdown spending shift will instead drive up the price of services such as going to the movies or staying in hotels. Those may prove stickier.
US rental costs, in particular, are being boosted by a dearth of affordable housing. That may put upward pressure on inflation into 2023 and “maybe even beyond,” Goldman’s Hatzius says.
* * *
For now, at least, there’s a growing consensus that the worst of the current inflationary episode is passing for many economies, even if doubt lingers over how fast the decline will be and how far it will go.
“The inflation peak is not very far from here and should be in place soon,” said Priyanka Kishore of Oxford Economics. “There may of course be outliers. But this is more due to idiosyncratic country factors rather than the global price pressures.”
Politico adds, Team Biden’s dour mood eases as gas prices fall:
After a brutal six months of soaring inflation and sinking consumer confidence, the Biden administration is seeing signs of hope on the economy.
Inflation may finally have peaked. Gas prices have fallen for more than two months.
76 straight days of gas prices falling, per @AAAnews …
— Ronald Klain (@WHCOS) August 29, 2022
According to AAA, gas prices have fallen forty cents in the last month from $4.25 per gallon to $3.85 per gallon. Gas prices remain up seventy cents per gallon from where they were one year ago, but they have been down $1.86 per gallon since June 14, 2022. If gas prices continue to decrease at their current rate, the price of a gallon of gas will return to previous levels in less than two months.
Note: The oil companies will never allow this to happen – two months would be the end of October, just before election day when people are voting early. The oil companies will engage in price fixing to keep the prices higher to prevent this from happening. Even so, be thankful that you live in the U.S. and not in Europe where sanctions for the Russo-Ukraine war against Russia are about to take a heavy toll on European economies tjhis winter. Quitcherbitchin.
The U.S. job market remains hot and unemployment is near historic lows. Issues other than epic price spikes and President Joe Biden’s dismal poll numbers now regularly dominate headlines.
None of these trends is a lock to continue. Prices remain highly elevated. Russia’s war on Ukraine could send oil prices soaring again. And Federal Reserve Chair Jerome Powell vowed Friday that the central bank will do whatever it takes to kill high inflation, triggering a stock market rout and fueling fears that the Fed could push too hard on raising interest rates and tip the economy into recession.
But for now, as one top Biden aide said, “the trend is our friend” and the trend looks a lot better than it did a few months back, with the government reporting that the Fed’s preferred measure of inflation decelerated in July.
“We saw a materially better inflation number on Friday, and lower gas prices mean we will probably see even more improvement in consumer sentiment,” said Jan Hatzius, chief economist at Goldman Sachs. “I’m cautiously optimistic on the path of inflation.”
That has helped create a lot better mood around the White House and in Democratic campaign circles at summer’s end than at its beginning. Existential dread about an inflation-fueled political wipeout in the November midterm elections has declined. Political polling sites such as FiveThirtyEight now give the party a slightly improved chance of holding the House, citing greater enthusiasm among base Democratic voters.
“Great to see consumers feeling better about the economy,” White House Chief of Staff Ron Klain tweeted Friday over a story about the second month in a row of a recovery in consumer confidence from record lows.
— The Democratic Difference (@DemDifference) August 26, 2022
Even as Klain tweeted, however, Wall Street delivered a signal of just how fragile the situation remains. Stocks tanked after Powell delivered his highly anticipated speech at an annual conference in Jackson Hole, Wyo., reiterating the central bank’s commitment to bringing inflation — which is still running at 40-year highs — much further down.
The central bank chief warned that continued rate hikes, which Wall Street and most Democrats want to see less of, will cause “some pain” to the economy.
The Fed’s actions have already pushed up mortgage rates and driven down new home sales. And home prices fell in July. If Russia’s war on Ukraine intensifies, that could drive up gas prices again as could failure to implement a global price cap on Russian oil, a top administration priority led by Treasury Secretary Janet Yellen.
Nonetheless, the outlook in the White House and in Democratic campaign circles is improved.
“I don’t think anyone expects that we are home free on the economy or inflation,” said a person close to the West Wing who was not authorized to speak on the record. “But we knew the tide was going to turn at some point on prices.”
The person added that there is “definitely a sense of optimism over what the next couple of months could bring. The vibe walking around here is still nervous but it’s way, way better than it was a month ago.”
Some Democratic officials now even whisper about actually holding onto the House, once an almost unthinkable outcome given public anger over inflation and Biden’s poor approval ratings on the economy and overall job performance. But a recent NBC poll showed voter approval of Biden’s handling of the economy has risen 7 points since May.
Most Democrats are hesitant to speak for attribution about what they view as their improved standing. But several senior administration officials told POLITICO that their optimism has risen, especially since Democrats squeezed out a special election win in a hotly contested Upstate New York swing congressional district, based largely on heavy turnout among abortion rights supporters.
“Gas prices are down and historic investments in building America are up thanks to Democrats,” said Chris Taylor, a spokesman for the Democratic Congressional Campaign Committee, which assists candidates for the House. “Republicans are on defense because in every election this summer, voters have rejected their extremist agenda.”
[R]isks to the current run of fairly decent economic data are everywhere. Still, senior administration officials now say they expect to see inflation continue to drop, allowing the Fed to slow down on hikes. And they expect the decline in gas prices — which already helped boost consumer confidence more than expected in August — to flow through into better numbers for Biden and Democratic candidates.
They are, however, staying cautious in public remarks given how high many prices remain.
“Lower gas prices are providing families with some much-needed breathing room but nobody should be contemplating any sort of victory lap because our work is not done and prices remain much too inflated,” Council of Economic Advisers member and longtime Biden economic aide Jared Bernstein said in an interview.
Despite the continued risks, Bernstein and other Biden advisers reject the notion pushed by some economists, including former Democratic Treasury Secretary Larry Summers, that inflation will meaningfully come down only when demand for labor eases and the unemployment rate rises by several points [old school thinking, this is a pandemic economy with new rules that are still being developed], perhaps to 6 percent or more. They say that while some companies including Ford have announced layoff plans, many for now are simply enacting hiring freezes.
That has driven down the number of job openings from record levels without boosting an unemployment rate that’s now at 3.5 percent. [See what I mean? This is a pandemic economy with new rules that are still being developed].
Indeed, both some recent public polling and Wall Street predictions on inflation offer some support to Democratic optimism that the midterms will not be completely dominated by economic malaise.
Democrats point to the recent NBC News poll showing “threats to Democracy” as voters’ top concern, outpacing worries over the economy and inflation that have been the number one issue in every poll for months.
Do you really want to suffer through two years of THIS drama every day from insurrectionist Coup Plot Republican members of Congress like “Gym” Jordan and Ted “Cancún” Cruz?
“We don’t normally put ‘threats to Democracy’ on the issue agenda questionnaire, but we thought it was important to do it this time,” said Jeff Horwitt, who helped conduct the NBC survey. “And women’s rights came up more than anything else when we asked what kind of protest sign a voter might hold up. It’s not just Trump.”
Republicans are on the wrong side of both of these issues, and are on the wrong side of history.