Inflation Has Two Months To Show Signs Of A Turnaround

September will be a pivotal month for the future trajectory of the U.S. macroeconomy. The Federal Open Market Committee (FOMC) will meet for the antepenultimate time, following last week's 75 basis point hike. Citing increased uncertainty, Chair Powell did not provide forward guidance regarding September's decision. It will depend on incoming data, leaving the door open for an increase of anywhere between 0.25 to 0.75 percentage points. Despite the uncertainty, the FOMC has clarified what needs to happen for rate hikes to stop.

During the last months of summer, the FOMC will be monitoring whether inflation is cooling in a sustained manner. Typically, the focus is on year-over-year numbers; however, it will appear slightly higher due to slower price growth last summer. From July to September 2021, the Personal Consumption Expenditures (PCE) price index grew an average of 0.38% month-over-month (MoM), markedly lower than the 0.55% average seen in the months before and after summer 2021. Since the base effect will drive up year-over-year comparisons for the remainder of summer, attention will turn to the MoM changes. The FOMC wants MoM figures to return to the historical 0.3% range or below. If this happens, they will opt for smaller increases of 0.5 or even 0.25, if the decrease is significant. If not, another 0.75 is most likely, especially if job openings remain at their current elevated highs.

Elevated job openings highlight the growth occurring in the economy that two consecutive negative GDP readings hid. Services, such as food services and accommodation, continued to grow while goods consumption continued to shrink. Higher exports of goods, namely oil and gas, and fewer imports improved the trade balance. Slower inventory build-up pulled GDP down by two percentage points in 2Q22. Rate-sensitive areas like investment, specifically residential construction, contracted. Because we will not have another GDP reading before the September FOMC meeting, job openings will serve as a guide for growth.

Percentage Point Contribution to Percent Change of GDP*		3Q21	4Q21	1Q22	2Q22
Consumption	Durable Goods	-2.21	0.22	0.49	-0.22
	Nondurable Goods	0.3	0.06	-0.56	-0.85
	Services	3.57	1.48	1.31	1.78
Investment	Nonresidential	0.22	0.4	1.26	-0.01
	Residential	-0.38	0.1	0.02	-0.71
	Change in Inventory	2.2	5.32	-0.35	-2.01
Trade Balance		-1.26	-0.23	-3.23	1.43
Source: Big Data Federation, Inc.

The next obvious question is whether it is likely that inflation will calm to a 0.3% MoM gain by September. Earnings calls suggest that inventory build-up at retailers will lead to price reductions for goods. These should begin to appear in the PCE price index by the end of summer. Within headline inflation, gasoline prices are falling while food prices are still rising. For core inflation, airline tickets and hotel room rates are dropping while used and new car prices continue to climb. Whether the declines can offset increases will be closely watched through the summer.