The threat of inflation appears to be receding

The consumer price index

Today it comes out Bureau of Labor Statistics in the US its monthly inflation rate, the Consumer Price Index. By the time you read this, the CPI for August is already known, as is the financial markets’ initial reaction to it. A slight decline in annual CPI growth is expected, from 8.5 percent in July to 8.1 percent in August. On a monthly basis, a fall of 0.1 percent is even assumed. Should the figures turn out to be better than the above, a continuation of the stock market rise of recent days is realistic.

Energy and food

The expected decrease can largely be attributed to lower energy and food prices. For example, the price of gasoline in the United States fell from more than $5 a gallon to an average of $3.70. Gasoline is a significant part of the household budget in the United States. Food has also become cheaper in the past month. Energy and food together make up 22.5 percent of the KPI’s basket. For the average American, however, both things are relatively important.

core inflation

However, central bankers focus more on so-called core inflation. Food and energy are filtered out. It would be a less volatile representation of the general price trend. That is true, but it is forgotten that for the average American energy and food are very important expenses. Core inflation is expected to rise slightly further, from 5.9 to 6.1 percent on an annual basis and 0.3 percent on a monthly basis.

Will Joe Sixpack last?

For the economy, it is also particularly important, to what extent Joe Six Pack stands in its place in this praising violence. Thus according to Atlanta Wage Growth Tracker Last year, wages in the United States increased by 6.7 percent year-on-year. It seems nice to the employees, but in fact they are actually still getting worse. Although not to the same extent as the average European citizen.

Downward trend

Now the downward trend in food and energy prices looks encouraging. These are naturally very volatile and will contribute less strongly to inflation. More important, also for the central bank, is the extent to which the increased prices will trickle down to the wider economy. For example, housing accounts for no less than 32 percent of the CPI. Rents are much less volatile than energy and food and can remain high for a long time after they are held. The housing market is probably the biggest obstacle for the Federal Reserve to get inflation back on track.

The housing market is cooling down

Now the housing market in the United States has indeed cooled down as a result of the series of interest rate hikes by the Federal Reserve. House prices are still at the upper end, but there are decreases in several regions. In Seattle (home of Microsoft (NASDAQ: ) and Amazon (NASDAQ: ) ), the average price has already fallen 8 percent. The number of new homes sold fell by 30 percent. Not so strange when you know that a 30-year mortgage loan in the US can be taken out at an interest rate of 6.08 per cent. For now, at least, the housing bonanza in the US appears to be over.

Simple statistics

In addition to the development mentioned above, simple statistics play an important role. The current CPI is therefore 8.5 percent on an annual basis and may fall slightly. However, month-on-month inflation is already falling slightly, expected to be 0.1 percent. If that process continues, the CPI will fall further on an annual basis and may return to a (desired) level of 2 to 3 percent sometime in the spring of 2023. This is simply because the basis of comparison with a year ago is increasing, and the increase will therefore decrease . A decline, therefore, regardless of further actions by the Federal Reserve.

Worry less about inflation?

Now both the central bank and the national government will do everything in their power to curb inflation further. Think about further interest rate increases, but also, for example, the release of the US strategic oil reserve. Seen in this way, current inflation expectations – which this month have fallen from 2.3 to 2.0 per cent over the next five years – are not at all strange. The number of Google (NASDAQ: ) searches for the term inflation also fell last month. Apparently people are less worried about it. The afternoon CPI is not yet known, nor is the market’s reaction to it. But in the longer term, the outlook is slowly but surely starting to look a little more encouraging.

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