Inflation set to be another spike in July, economists say

Inflation in July is expected to be the highest since the start of the coronavirus pandemic, suggesting that the sharp rise in consumer prices has peaked, economists say.

Economists expect the consumer price index to rise 0.5% for July, a gain of 5.3% year-on-year, according to Dow Jones. This compares to a jump of 0.9% in June, or 5.4% on an annual basis, the largest monthly increase since August 2008.

Excluding energy and food, economists expect the CPI to have risen 0.4% last month, from the core’s 0.9% increase in June. Year over year, the core June CPI of 4.5% was the highest since September 1991.

“This will be another very hot issue with pandemic fingerprints all over the place,” said Mark Zandi, chief economist at Moody’s Analytics. Price increases are expected to continue – albeit at a slower pace – in airline tickets and accommodation, areas where demand was dampened as the economy reopened.

If the inflation report is warmer than expected, when released Wednesday at 8:30 a.m. ET, it could be slightly negative for stocks and push bond yields higher. Yields move opposite to price.

The report is not expected to have much of an impact on the Federal Reserve or its plans to scale back the $ 120 billion-per-month bond buying program it keeps in place to support the economy during the pandemic. The central bank said inflation is temporary and the market is looking more at employment data to see if the labor market is as strong as it appeared in the July jobs report on Friday.

The very hot CPI numbers are likely coming to an end, although the Fed’s preferred measure of inflation is the inflation component of personal consumption expenditure data.

“I think the last of the effects of the reopening will take place this month,” Zandi said, noting that July could be the hottest month for inflation.

“I think it will be a peak year over year, if not in July, then it was June,” he said. “We are here. We are reaching a peak.”

Zandi said rising used car prices should also be a factor, but the increase should not approach the 10.5% rise in June. Goldman Sachs economists expect used cars to give the CPI a boost, even as industry reports show price declines.

“We have 0.6 for the stock, 0.47% for the core,” said Jan Hatzius, chief economist at Goldman Sachs. “That’s pretty high by consensus and mainly because we’re probably going to get another big increase in the number of used cars, even if auction prices are dropping now.”

Even though the rise in the CPI has likely peaked, year-over-year comparisons should continue to look elevated due to base effects.

“I think it’s slowing down sequentially. Year after year, I think it’s going to stay high, until we go through these big sequential increases in the spring of next year,” Hatzius said. “Sequentially, I think we will see a marked slowdown after the August report.”

But even if the pace of inflation slows, the debate about its temporary nature will not end. Fed Chairman Jerome Powell said high inflation is expected to slow as supply chain issues are resolved.

Economists are eyeing rental prices, which have risen and are expected to continue to rise next year.

“A lot of things that were temporary and artificially boosted due to reopening and rising demand, these will slow down,” said Kevin Cummins, chief US economist at NatWest Markets. “The rental costs will compensate for this moderation.”

Cummins said rent rose 2.3% last year and is expected to rise 2.4% next year. But by 2022, increases will accelerate further and the CPI rent could rise by 3.2%.

Zandi said rent rose more than 8% year-on-year in June and is expected to rise 0.2% or 0.3% for the month of July. The rent, along with the owners’ equivalent rent, is about a third of the CPI, he noted.

“It takes a while for things that are happening in the rental market to show up,” Zandi said. “At the start of next year we’re going to get some really big rent increases. It’s persistent and sticky and a reason to fear inflation will be higher for longer.”

Cummins said he expects the core CPI to hit 2.6% by the end of next year, up from 2.1% in the Fed’s forecast. He noted that one difference is probably his calculation for higher rental prices. He expects the core CPI to stand at 4.2% by the end of this year.

Zandi said one area where increases at a slower pace is medical care.

“In the [personal consumption expenditure data], medical costs are much higher and housing is less important, ”he said. “The inflation measured by the CPI is going to be much higher than the inflation, measured by the PCE.

That in itself could be part of the debate.