Growth, Inflation & Policy
INFLATION TRENDS
- Cleveland Fed inflation nowcast for July is currently at 8.9% Y/Y, not providing significant relief from June’s surprise upside surprise of 9.1%.
- Inflation needs to come in below 0.5% in July M/M in order to decelerate.
- For reference, for CPI to subside to 5% Y/Y, inflation needs to come in at 0% M/M for 5 consecutive months
- While there are numerous reasons inflation should roll over (lower commodity prices, strong dollar, slowing growth), the shelter component of inflation could continue to accelerate for 6 months or more. Inflation will thus likely remain elevated through the end of the year.
RATE HIKE EXPECTATIONS
- The next FOMC meeting is next week (July 27th) and expectations are for a 75-bps hike.
- Current expectations, as per the Fed futures curve, suggests the Fed will be done hiking by the end of the year and will then revert to cutting by as early as March next year.
- While this may seem positive, there is risk of over optimism. If demand doesn’t come down as the Fed hopes, inflation may not come down by enough to alter the Fed’s trajectory. If demand does indeed come down, what happens to asset prices? It’s a three-horse race between the Fed’s mandates: price stability, maximum unemployment and financial stability
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