Please see below an article received from Evelyn Partners yesterday (12/07/2023) afternoon, which details their thoughts on yesterday’s US CPI Inflation announcement:
What happened?
US June annual headline CPI inflation rose 3.0% (consensus: +3.1%), its lowest level since March 2021, and compares to 4.0% in May. In monthly terms, CPI rose 0.2% (consensus: +0.3%), compared to a gain of 0.1% in May.
June annual core inflation (excluding food and energy) rose 4.8% (consensus: +5.0%), versus 5.3% in May. In monthly terms, core CPI rose 0.2% (consensus: +0.3%), compared to a gain of 0.4% in May.
What does it mean?
The Fed should take some comfort in the fact that monetary tightening appears to be working to bring down inflation ahead of the FOMC meeting on the 26 July. Annual headline CPI inflation is heading back towards pre-pandemic rates and core (ex-food/energy) price rises are now below 5%. There are three reasons to expect underlying inflation to slow further from here.
First, supply chain disruption from the pandemic has lessened significantly. One way to observe this is through used car prices, which are now falling on an annual basis as production normalises. This puts downward pressure on a past key driver of core CPI inflation during the early stages of Covid from 2020.
Second, rental inflation continues to slow. Using data from timely online residential platforms, recent research from Goldman Sachs shows that average annualised rental inflation has eased to just +1% over the last 8 months to June from 20% plus in mid-2021. It will take time for lower rental prices to feed through to inflation, but there is evidence it is starting to happen. For instance, June shelter CPI inflation slowed to 7.8% from a peak of 8.2% in March. CPI inflation (ex-shelter) in June was up just 0.8% from a year ago.
Third, lead indicators point to lower core inflation in the months ahead. Selling prices from the National Federation of Independent Business, or better known as the small business survey, have fallen to a level last seen when core CPI inflation was roughly 4%. The annual change in job openings is another lead indicator with a decent track record of leading inflation and this too points to lower pace of price gains ahead.
Bottom Line
Regardless of whether the FOMC (the US Central Bank’s interest-rate setting body) raises interest rates later this week or not (markets’ expectation is current for a 25bps increase), the Fed is likely coming to the end of its interest rate hiking cycle. This reduces the risk that the FOMC overtightens on interest rates and creates downward pressure to the economy and financial markets. Moreover, as a countercyclical currency, we expect the dollar to depreciate against other major currencies, since the risk of a so-called economic hard landing is reduced. Dollar depreciation should provide additional liquidity, which will help equities to continue their bull run.
Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Carl Mitchell – Dip PFS
Independent Financial Adviser
13/07/2023