Inflation could rebound in the U.S. late this year. And maybe that’s OK.


U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning. 

Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years. 

On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month. 

“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX. 

If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall. 

The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX. 

PCE is said to be U.S. central bankers’ preferred inflation metric.

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Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden. 

“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden. 

Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

“In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

See: Fed has ‘more work to do’ to get inflation back down, Daly says

Also read: Worker pay at center of Fed’s inflation fight

Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025. 

“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average DJIA gained 0.4%, and the S&P 500 SPX was unchanged. The Nasdaq Composite COMP fell 0.5%.

Read on:

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