Here’s what to expect ahead of tomorrow’s highly anticipated inflation reading

American consumers and businesses don’t always agree. But when it comes to inflation, every American seems to agree that sky-high prices are the biggest problem facing the country today.

After more than a decade of low inflation following the Great Financial Crisis of 2008, the global economy was hit by a wave of inflationary pressures when the COVID-19 pandemic began in 2020.

The good news is that inflation is down from four-decade highs.

The most common measure of price increases in the U.S. economy, the consumer price index (CPI), rose 8.5% year-on-year in July, after jumping 9 .1% in June, the largest since 1981.

And with the release of the August CPI report on Tuesday, investment banks and wealth managers say they expect consumer prices to continue falling. However, they also warned that returning to the Federal Reserve’s 2% inflation target could be a challenge due to “persistent” increases in core prices and rising wages.

“Even with the prospect of peak inflation, consumer prices remain high and are expected to remain so over the coming months,” said Russell Evans, managing director of Avitas Wealth Management. Fortune.

Here’s what experts say they expect from August’s CPI reading.

Morgan Stanley

Morgan Stanley economists, led by Julian M. Richers, said in a research note on Wednesday that they expect Tuesday’s CPI reading to show inflation fell 0.23% in August from the previous month, pushing the measure of headline inflation year-over-year to 7.9% .

Richers argued that much of the decline would be the result of an estimated 6.4% monthly drop in energy prices. Energy prices in the United States have fallen lately, due to a drop of more than 25% in gasoline prices since mid-June, according to the American Automobile Association. The decline comes as demand for oil declines as the global economy slows and recession fears grow along with increased production. Oil prices, as measured by West Texas Intermediate futures, were trading below $88 a barrel on Monday, down more than 27% from the June high.

However, Richers added that he expects core inflation, which excludes volatile food and energy prices, to hit 6.1% in August as “rent inflation is expected to remain strongly elevated for some time”.

Bank of America

Michael Gapen, Bank of America’s chief U.S. economist, said in a research note on Thursday that he also expected inflation to post its first monthly decline since May 2020 in August.

However, Gapen estimates that energy prices were down just 5.2% last month (Morgan Stanley says 6.4%), while food prices were down 0.9%, versus down 1.1% a month ago.

The more restrained outlook for lower energy and food prices means the headline CPI, year-on-year, will fall to just 8.2%, according to Gapen.

“High wages should continue to put upward pressure on food away from domestic inflation, and although commodity prices have fallen recently, this will take time to feed through to consumer prices,” Gapen wrote.

The economist added that he expects core CPI to rise 0.3% in August to 6% year-on-year. Lower used-car prices are easing some pressure on core prices, but high rent inflation will keep the figure well above the Fed’s target rate for some time, he said.

Gapen also noted that another significant increase in rent prices would be a significant concern for the Federal Reserve, which has tried to stifle inflation with interest rate hikes throughout the year.

UBS

UBS chief US economist Jonathan Pingle also said in a research note on Friday that headline inflation “looks set to decline further in August data released next week.”

It predicts the CPI fell 0.03% in August and 8.1% year-on-year amid “falling gasoline prices”.

And like the others, Pingle says core inflation remained elevated last month. It predicts that the core CPI rose 0.43% in August and 6.2% from a year ago due to higher prices for rents, hotel rooms and medical services. .

By the end of the first quarter of 2023, however, UBS says inflation will be back near the Fed’s 2% target rate.

“We expect the monthly pace of inflation to slow significantly over the rest of the year, with [economic] fundamentals are weakening and futures prices suggest further declines in retail gasoline prices,” Pingle wrote.

Goldman Sachs

Goldman Sachs chief economist Jan Hatzius said in a note on Sunday that he believed inflation fell 0.13% month-on-month in August, leaving consumer prices up 8.1% year-on-year.

He argued that the prices of plane tickets, cars and oil were falling as part of “easing supply chain constraints”, which should help reduce headline inflation. However, like his peers, Hatzius believes core CPI will rise in August, marking a 6.1% increase from the same period a year ago.

“We expect continued strength in services inflation due to wage pressures, labor shortages and elevated near-term inflation expectations. Specifically, we are looking for a solid set of refuge readings and a 0.6% increase in education prices due to higher tuition and child care costs for the new school year,” he wrote.

Wealth and investment managers

Wealth managers are also predicting that inflation fell last month and, like their investment banking counterparts, they say the Fed will stick to its interest rate hikes this year in an attempt to rein in inflation. consumer price.

Evans of Avitas Wealth Management said Fortune that he thinks inflation has peaked, due to recent declines in gasoline prices, travel and accommodation prices, and weaker-than-expected manufacturing data. But he also worries about the Fed’s ability to bring inflation back to its target rate and argues that a 75 basis point rate hike is needed in September to get the job done.

“Even with the prospect of peak inflation, consumer prices remain high and are expected to remain so in the coming months, which would warrant further action by the Fed,” he said. .

Bob Doll, chief investment officer at Crossmark Global Investments, said Fortune that even if headline inflation is down, underlying inflation remains “problematic” for the central bank.

Doll noted that the labor market remains hot, with the U.S. economy adding 315,000 jobs last month, even as the Fed has raised interest rates four times so far this year.

In his mind, that means central bank officials are far from done tightening monetary policy. However, he argued that the “delayed effects” of the Fed’s inflation-fighting policies will become “increasingly apparent” in the coming months, driving inflation down.

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