The easing of inflationary pressures has given the economy some breathing room for now

Shopping carts are seen in a supermarket as inflation impacts consumer prices June 10, 2022 in Manhattan, New York City, USA.

Andrew Kelly | Reuters

If inflation is the biggest threat to US economic growth, July data should point to at least some easing in the pipeline.

Prices were flat over the month, as measured by items tracked by the Bureau of Labor Statistics for the Consumer Price Index. This is the first time the aggregate metric has not increased month-over-month since May 2020, when the widely-held index showed a modest decline.

Just one month ago, the CPI posted its highest 12-month rise since November 1982. This follows a trend that contracted economic growth in the first half of this year and sparked rumors of a recession.

But economic optimism is gaining momentum, with at least some short-term trends suggesting that price inflation is slowing.

No recession so far

“The whole recession narrative needs to be shelved for now,” said Aneta Markowska, chief economist at Jefferies. She “I think there will be a shift to a strong long-term narrative that is really supported by inflation reversals.”

Markowska, whose forecasts were accurate this year, expects solid growth in the near term, including 3% growth in the third quarter. Her GDPNow gauge for the Atlanta Federal Reserve, which tracks economic data in real time, showed her growing 2.5% in Wednesday’s update, up 1.1 percentage points from the last on Aug. 4. did.

But Markowska expects pressures to pick up in 2023, with a possible recession later in the year.

In fact, there was a bit of discussion of both in the CPI report.

Most of the easing of inflation is due to lower energy prices. Gasoline dropped his 7.7%, its biggest monthly drop since April 2020. Fuel oil fell 11% as energy-related commodity prices fell 7.6%.

The cost of transport services also rose, with airfares falling 7.8%, reversing the trend of a 27.7% surge in tickets over the past year.

But the report found few other signs of lower inflation, including particularly high food costs. In fact, the food index rose 1.1% month-on-month, and his 10.9% pace over the past 12 months is his highest since May 1979.

This has caused concern in places such as City Harvest, which helps feed poor New Yorkers who have been hit particularly hard by the skyrocketing prices that began last year.

Jilly Stevens, CEO of the organization, said: “Even before the pandemic hit, food insecurity was out of control. Now, rising prices are driving even more people to the pantry.”

A year into the Covid pandemic, the number of children seeking food assistance has nearly doubled, and organizations are struggling to keep up, Stevens said.

“We are always optimistic because we are supported by incredibly generous New Yorkers.

people keep spending money

Despite rising prices, consumers are resilient and continue to spend despite inflation-adjusted wages contracting by 3% over the past year.

Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending is at a healthy pace, with inflation affecting behavior, but spending has dropped to about 10% over the past year. He said it was up 10.5%.

“If you look at specific categories, there are a lot of changes in spending and as a result some categories are more affected by inflation than others,” he said. “People are delaying spending on discretionary items.”

For example, department store spending decreased 2.4% over the past year, while discount store spending increased 17%. Amusement park spending is down 18%, but movie theaters are up 92% of him. Some of these numbers are affected by price increases, but they generally also reflect levels of trading.

Silver expects discretionary spending to rise as inflation eases.

“We believe there will be a spike in the second half of the year that will lead to an upward trend in spending in key categories where consumers are delaying or postponing spending,” he said. You may receive a holiday gift with a slightly lower price.”

Meanwhile, year-on-year inflation is still hovering at 8.5%. Rick Ryder, chief investment officer for global fixed income at asset manager BlackRock, said it was the first positive rally in 40 years and was “worrisomely high.”

The Federal Reserve is at the center of concerns about global growth, and there are fears that interest rate hikes aimed at curbing inflation will cause the economy to slow significantly, leading to a recession.

Following Wednesday’s report, traders shifted bets to expecting the Fed to raise rates by 0.75 percentage points in September, rather than the previous trend towards 0.75 percentage points.

“Today’s continuation of strong inflation data, combined with last week’s strong labor market data and perhaps still-robust wage gains, gives Fed policymakers a clear path to continued aggressive tightening. ,” he wrote.

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