There appears to be some confusion about the trajectory of prices in the US. That's partially because month-over-month inflation eased in July while year-over-year, it remained near historic highs.
That raises an important question for consumers and investors alike: Is inflation peaking or not?
The answer, according to the market analysts, is probably. But there's still a long way to go before we are where we want to be.
First of all, we need to remember that the 'I' in CPI and PPI stands for index. That means that shrinking inflation could come from prices falling in some sectors but not others. And that's exactly what's happening. Energy prices have dropped significantly over the last two months, dragging the top-line inflation numbers down along with them. But the costs of food, shelter and nearly every other commodity are increasing.
That's worrisome because it means that "sticky" inflation is here. Shelter, healthcare and education prices all remained elevated, and those sectors tend to adjust their prices more slowly — so once they increase, they tend to stay high.
"We believe the worst of energy and supply chain inflation is behind us. However, the persistence of sticky categories will likely help keep inflation in the 5.5% to 6% range by the end of the year, mirroring trends across the globe," said Scott Ruesterholz, a portfolio manager at Insight Investment, which has $1 trillion in assets under management.
It's likely that we've reached peak inflation, agreed Charlie Ripley, a strategist at Allianz Investment Management. "However, we would caution that while the trend is improving, we have a long way to go to get back towards [the Fed's target goal of] 2% inflation."
Morningstar and the IMF both predict a return to normal by the end of 2023 or beginning of 2024. The Fed agrees: in its most recent economic projections from June, the central bank predicted that it would be within its target rate of 2% inflation by 2024.
So price increases are easing but it's going to take a while to get back to what the Fed considers acceptable.
The market digested this news as mostly positive. Investors expect rates to increase, but at a slower pace. They now expect a 50 basis point hike in September, down from 75 basis points less than a week ago.
Still, they still don't believe the United States will avoid a recession.
About 90% of traders see one as somewhat to highly likely, and 74% anticipate it will begin this year, according to a recent Charles Schwab Trader Sentiment Survey.
Thankfully, they don't see an extended timeline for consumer pain.
Most traders expect a recession would last less than one year just as they expect inflation to ease by the end of 2023.
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