Consumer prices in the United States did not rise in July, compared to the previous month, due to a sharp drop in the cost of gasolinewhich was the first sign of relief for Americans who saw inflation rise in the last two years.
Also, China’s factory price rise slowed to a 17-month low in annual terms, while consumer prices advanced less than expected.
After wrongly predicting last year that high inflation would be transitory, most central bankers have given up trying to put an exact date on when they expect price growth to peak.
Nevertheless, US Federal Reserve officials see inflation slowing in the second half of the year, the European Central Bank places the peak in the third quarter, and the Bank of England sees it in October.
Raw materials get cheaper
The main driver of last winter’s rise in consumer prices – energy and other commodities – may be the harbinger of lower inflation this time.
The prices of many key raw materials, such as oil, wheat and copper, have fallen in recent months; the Refinitiv index, which covers everything from crude oil to orange juice, is down nearly 20% from its May high.
The fall mainly reflects the weakness of world demand in a context of economic recession, from China to the United States and Europe, where consumers are struggling to cope with high prices.
The situation of economic activity is already having repercussions on some measures of inflation: the proportion of manufacturers seeing rising input costs is shrinking and wholesale price growth is slowing in much of the world. And all this should end up having repercussions on consumer inflation.
Energy prices in Europe on the rise
European households are unlikely to see their energy bills drop anytime soon and there is increasing talk of rationing in countries like Germany.
And it is that gas prices in Europe, which for years depended on Russia for a large part of its imports, they remain four times higher than a year ago and are close to all-time highs.
Even in Britain, which has its own gas but very little storage capacity, consumers will see their electricity bills skyrocket in October when the current price cap expires.
There is also bad news for German drivers, who will see a subsidy at the fuel pump expire at the end of August.
Expectations are mostly under control
Some central bankers can take comfort in the fact that investors have not lost faith in them. Market measures of inflation expectations in the US and the euro zone are just above central banks’ 2% target, while they remain uncomfortably high in Britain.
Even the message from households, which are slower than markets to react to changes and tend to overestimate inflation, is not one of panic.
Consumers surveyed by central banks in the United States, the euro zone and Britain see inflation above 2% for several years, but not much beyond 3% at most.
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Courtesy: Notimer
The vast majority of economists in a Reuters global poll also said it will take at least a year for the crisis to subside significantly, while 39% believe it will take longer.
Core inflation may trend lower
Measures of inflation that exclude energy and food prices have already started to decline in the United States and Britain, with some predicting that Japan and the euro zone will follow suit.
Core inflation remains well above the comfort zone of central banks in both developed and developing economies, meaning further monetary policy tightening is needed.
Nevertheless, the latest slowdown in the US and UK showed that recent interest rate hikes were already having some effect.
An artificial intelligence model used by Oxford Economics suggests that core inflation will also peak in Japan and the euro zone in the second half.
The short-term memory network, originally developed to help machines learn human languages, analyzes detailed data on inflation to detect patterns that help it predict the consumer price index in the future.
Wages point up
Workers’ wages are a long way from catching up with the price rises of the past year, but they are at least making up some ground.
Unit labor cost, that is, the value of labor for each unit of output, grew nearly 10% for US nonfarm businesses in the second quarter of this year, according to data this week.
Wages are one of the most important drivers of prices in the long run and, if they rise too quickly, they can start a vicious circle of price increases.
However, outside the United States, the rebound has been more modest and the next recession may weaken the workforce in wage negotiations.
Source: Ambito
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