Peak Inflation Watch: August 12, 2022

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The latest US inflation figures suggest that the recent surge in price pressure has peaked…maybe. The biggest risk is that consumer inflation remains high. If so, this is a significant headwind for the economy and financial markets, even if consumer prices (IPC) no longer accelerates.

The good news: the CPI is showing slight signs of a spike after the release of the July figures. Core CPI and Core CPI are slightly below their recent year-over-year highs.

Peak Inflation Monitoring

Encouraging, but with the caveat that inflation remains high and the Federal Reserve should therefore continue to raise short-term interest rates. Fed Funds Futures are currently pricing in a virtual certainty of another 50 or 75 basis point rate hike at the next FOMC meeting on September 21.

Examining alternative and arguably superior measures of consumer inflation trends continues to paint a mixed picture, based on reading CPI data via CapitalSpectator.com’s Inflation Bias Indices. The methodology takes a standard inflation index, calculates the change over one year, then calculates the monthly difference and transforms the results into standard deviations around the mean. This measure of bias offers a way to develop a quantitative idea for deciding which direction the inflationary wind is blowing.

The bias for core CPI, which is considered a more reliable estimate of future inflation, widened in July, although it remains well below its recent peak. On the other hand, the headline CPI eased, mainly due to the drop in energy prices in July. Overall, this data suggests that inflation has peaked, but it is not yet clear that a sharp decline at a moderate pace is imminent.

Peak Inflation Monitoring

Another set of alternative (and arguably more robust) measures of consumer inflation calculated by regional Fed banks continue to paint a mixed picture, based on examining the data through the bias methodology of CapitalSpectator inflation mentioned above. Two of these indices reflect rising inflationary pressures in July, while two other benchmarks show declining pressures.

Peak Inflation Monitoring

The bottom line: There are signs that inflation has peaked, but it’s still premature to assume the worst is over. A clearer picture, for better or worse, will likely emerge over the next few months. In the meantime, the Fed appears poised to continue tightening monetary policy until price data looks more compelling to support the story of a spike in inflation. and is down substantially. This combination is a high bar and, at the moment, still seems elusive.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

Carol N. Valencia