Has US Inflation Peaked? "Champagne Not Yet" and Warnings Against "Premature Victory Declaration"

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[Asia Economy New York=Special Correspondent Joselgina] Has US inflation truly peaked? As the July Consumer Price Index (CPI) increase fell short of market expectations, reigniting theories of an inflation peak, many caution that it is still too early to pop the champagne. The Federal Reserve (Fed), which has positioned itself as an 'inflation fighter,' still has a long way to go to reach its 2% target, and ongoing geopolitical tensions could easily put upward pressure on oil prices. Amid the market's enthusiastic cheers, warnings have emerged that "declaring victory too early would be a mistake."

◆Biden: "My Economic Plan Is Working"

The US Department of Labor released the July CPI on the 10th (local time), showing an 8.5% increase year-over-year, significantly below the market forecast of 8.7%. The increase also slowed considerably compared to the previous month’s 9.1%, the largest rise since November 1981. This is analyzed to be directly influenced by the recent sharp drop in energy prices, including gasoline. The month-over-month CPI increase was 0%.

President Joe Biden immediately gave a positive assessment, saying, "We are seeing signs that inflation can ease." He emphasized that "inflation was zero last month," indicating the halt in the upward trend, and added, "This is proof that my economic plan is working."

The market also cheered. Although the increase remains in the 8% range, it is seen as a sign that the effects of the Fed’s aggressive monetary tightening policies, implemented since March, are becoming visible.

On this day, the theory of an inflation peak revived risk asset preference, leading the New York stock market to close higher across the board. Capital Economics reported, "Expectations that inflationary pressures will weaken further have spread," reflecting the mood.

With inflation indicators easing, speculation has risen that the Fed may opt for a big step (0.5 percentage point hike) instead of a giant step (0.75 percentage point hike) at its September meeting. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market had priced in a giant step possibility of over 68% until the previous day but has since dropped to 41.5%. Conversely, the probability of a big step rose from 32% the previous day to 58.5% on this day.

◆Warning: "Declaring Victory Too Early Would Be a Mistake"

The key issue is the future trend. Jeffrey Rosenberg of BlackRock said, "Inflation will fall," but questioned, "To what level?" Defining last year, when debates over whether inflation was 'transitory' took place, as Act 1, he explained that the main point of Act 2 is how quickly and to what extent inflation will decline.

There are also repeated criticisms that the July CPI is insufficient as a definitive signal that inflation has peaked. The New York Times (NYT) referenced Cleveland Fed President Loretta Mester’s earlier warning that "declaring victory too early in the fight against inflation would be a mistake," noting, "It is a positive improvement but not enough to claim victory."

Excluding the energy sector, the annual service price inflation rate remains at 5.5%, unchanged from the previous year. Since the recent decline in the indicator is largely due to energy prices, any rise in oil prices could again increase inflationary pressures.

Concerns are also raised about persistently high housing costs and rents. Additionally, a strong labor market may fuel wage increases, contributing to medium- to long-term inflationary burdens. Analysts at Bloomberg Economics said on this day, "Rents are still rising, and wages have begun to be reflected in prices," forecasting that the core CPI inflation rate could reach 7% within the next few months.

Greg McBride, Chief Analyst at Bankrate.com, pointed out, "To reach a peak, we need to see a broad and sustained decline," adding, "That is not the case yet." Brian Nick, Chief Investment Officer (CIO) at investment firm Nuveen, said, "I will keep the champagne bottle closed for now."

◆Fed Officials: "We Will Stay the Course"

Hawkish remarks from Fed officials continue.

Neel Kashkari, President of the Minneapolis Fed, said on this day, "It is still too early for the Fed to declare victory," adding, "This is the first sign that inflation is starting to move in the right direction, but I have not changed my path." He noted, "Market expectations that the Fed could start cutting rates early next year are unrealistic," and pointed out, "It is more likely that rates will be held steady until inflation reaches the 2% target after rate hikes." He will participate in Fed policy rate decisions starting next year.

Charles Evans, President of the Chicago Fed, also described the data as "not a level to be happy about," stating, "Considering still high inflation, it is appropriate to raise rates to 3.25-3.5% by the end of this year and 3.75-4.0% next year."