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An Insight on July Inflation Numbers

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Andrew R. Michaud

• August 12, 2023

Now that the July inflation numbers are behind us, investors may be wondering if the Federal Reserve will have to do more to get price growth back down to its 2% target. Bank of America’s analysis reveals that while further action may indeed be necessary, it is unlikely to occur in the near future.

Wholesale Inflation Levels Continue to Rise

The latest data on wholesale inflation, as measured by the producer price index, showed a notable increase of 0.3% from June to July. This follows a period of stability in the prior month. Notably, this gain exceeded economists' expectations of a 0.2% increase, as indicated by a FactSet survey.

Consistency in Consumer Price Index

Similarly, the consumer price index recorded a month-over-month increase of 0.2% in July, remaining unchanged from the rate observed in June.

Implications for Monetary Policy

Despite the unexpected rise in the producer price index, economists at Bank of America do not anticipate a rate hike at the upcoming Federal Open Market Committee policy meeting scheduled for Sept. 19-20. In fact, they have revised their forecast for a final rate increase in the current aggressive series to the Fed’s Oct. 21-Nov. 1 meeting.

In conclusion, while inflation remains a concern, it seems that immediate action by the Federal Reserve may not be imminent. Investors will need to closely monitor future developments to assess the potential impact on financial markets.

The Fed's Delicate Balancing Act with Interest Rates

The Federal Reserve (the Fed) has undertaken a series of interest rate hikes, raising them a total of 11 times since March of last year. In fact, out of the 12 policy meetings during this period, they only decided to keep rates unchanged in one instance. The primary objective behind these rate increases is to tackle inflation by curbing the demand for goods and services. However, the Fed must exercise caution with this strategy as an excessive approach could inadvertently cause a recession instead of a controlled economic slowdown.

Bank of America (BofA) is now reconsidering their previous forecast, shifting their stance due to the spread of disinflation. Disinflation refers to a decline in the rate of price growth, even though prices as a whole may still be rising. BofA's Michael Gapen has highlighted that the number of categories experiencing an inflation rate of 5% or higher over a three-month period has dropped to 23.2%. This is the lowest level since November 2020.

As of July, annual inflation stood at 3.2%, down from its peak of 8.9% in June of the previous year.

In addition to the deflationary trend, Gapen has drawn attention to recent statements made by Fed officials. Philadelphia Fed President Patrick Harker stated at an event this month that the Fed might be at a point where it can maintain steady rates. Meanwhile, New York Fed President John Williams mentioned in an interview with the New York Times this week that he believes monetary policy is currently on solid ground.

The Importance of Patience: Allowing Time for Economic Assessment

In a recent analysis, it has been highlighted that granting the Federal Reserve an additional six weeks could prove beneficial in evaluating the economy's trajectory. This period would provide ample time for the Fed to thoroughly assess various factors impacting the economic landscape.

With this extended timeline, experts believe that a more comprehensive understanding of the current state of affairs can be achieved. By carefully observing key indicators and market behavior, the Federal Reserve can make well-informed decisions that align with the needs and demands of the economy.

Taking the time to analyze and gauge the trajectory of the economy allows for a more strategic and nuanced approach. It provides the opportunity to adapt policies and make adjustments that can effectively address challenges and uncertainties. By keeping a watchful eye on emerging trends and developments, the Fed can ensure a balanced and sustainable economic growth.

In conclusion, extending the assessment period by six weeks would offer invaluable insights into the current state of the economy. This patient and thorough analysis would empower the Federal Reserve to make informed decisions that foster economic stability and prosperity.