Inflation deceleration

Aug 10, 2022

By Sam Sutton , Eleanor Mueller and Aubree Eliza Weaver

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Investors, consumers and economists generally expect inflation to decelerate after the Federal Reserve raised its benchmark rate by 75 basis points in consecutive months earlier this summer — marking one of the most aggressive pivots in the central bank's history.

The question is, how big of a drop will we actually see? And will it be enough to relieve pressure on the Fed as it plots a course for additional rate increases that could push the economy into a recession?

Data from both public and private sources released in the run-up to today's Consumer Price Index report for July offers faint but important glimmers of hope that the economy might not be running headlong into a period of declining growth and rapid inflation.

Gas and many commodities prices are continuing to fall. New data produced by Adobe on Tuesday found evidence of deflation for the first time in more than two years on e-commerce hubs for electronics, apparel and other consumer goods. Home sales are on ice now that mortgage rates have started to ascend. Consumers have told the New York Fed that they no longer expect inflation to be quite as bad as they did as recently as June.

These are signs that the U.S. is finally "turning the corner on inflation," Moody's Analytics Chief Economist Mark Zandi said in an interview on Tuesday.

If those factors translate into a meaningful decline in the CPI — the Fed's preferred measure is the Personal Consumption Expenditures Index — expect President Joe Biden and Democrats to seize on the news as a sign that better, cheaper days are finally ahead.

But turning the corner on inflation is not the same as beating it back. Zandi and other economists who spoke to Victoria Guida and me yesterday said it will be some time, perhaps in 2024, before the Fed sniffs its 2 percent target rate. What's more, if those declines aren't matched by similar downturns in "core inflation" — a gauge that measures prices without factoring in volatile food or energy costs – both the Fed and the economy will be in for a very challenging next several months.

Finally, if a reduction in CPI matches the consensus expectation — economists forecast 8.7 percent, less than half-a-percentage point off the previous month's 9.1 percent increase — that would still constitute a massive spike compared to where prices were last year.

Republicans are keenly aware of how difficult that will make things for their opponents in the midterms.

In the words of Sen. Rick Scott, the Florida Republican who's leading the GOP's charge to take over the upper house: "Even if it comes down a little bit, it's still going to be bad."

IT'S WEDNESDAY — Have a tip, story idea or other feedback for any of us? Hit us up at kdavidson@politico.com , ssutton@politico.com or aweaver@politico.com .

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Driving the Day

The Bureau of Labor Statistics releases wage and inflation data at 8:30 a.m. … The SEC meets to discuss new reporting requirements for all filers and large hedge fund advisers … The House Rules Committee takes up the Inflation Reduction Act at 2 p.m.

WHAT'S GOING ON WITH WAGES? — A few months ago, economists were predicting slower wage growth. Last week, a number of those same experts acknowledged that may not be the case as the July jobs report revealed just how robust the labor market remains.

"As a macroeconomist, you just want the data to send you a clear picture," Bank of America's Michael Gapen, who heads U.S. economics for the bank, told POLITICO's Morning Shift. "Friday's numbers were just a punch in the face."

This morning, we'll get yet another piece of the puzzle courtesy of the Bureau of Labor Statistics' report on real earnings in July — out at 8:30 a.m. along with monthly inflation data. In June, real earnings — or average hourly earnings when accounting for the cost of living — dropped by 1 percent as prices hit record highs.

July may not be much different. Inflation is expected to subside somewhat, Gapen tells Morning Shift: "The headlines should be super soft … because we expect payback in energy" as gas prices finally recede. Most banks peg the year-over-year number around 8.8 percent — down from the prior month's 9.1 percent. – Eleanor Mueller

WHERE IT'S AT — WSJ's Sarah Chaney Cambon: "Workers' wages are rising briskly, a factor contributing to four-decade high U.S. inflation … Wage gains help consumers spend money in the face of higher prices for restaurant meals , groceries and lodging. But many companies are having to pay more for labor at the same time that other business expenses are rising, including for transportation and logistics."

PROJECTIONS — AP's Christopher Rugaber: "Thanks largely to falling gas prices, the government's inflation report for July, to be released Wednesday morning, is expected to show that prices jumped 8.7% from a year earlier — still a sizzling pace but a slowdown from the 9.1% year-over-year figure in June , which was the highest in four decades."

KNOW WHEN TO WALK AWAY, KNOW WHEN TO RUN — Our Declan Harty: "Wall Street's top derivatives regulator has deemed that one of the country's only political betting markets has just six more months to live. PredictIt — an 8-year-old trading hub where thousands of Washington insiders and politically savvy investors wager on everything from whether President Joe Biden will be his party's 2024 nominee to who will win the San Jose mayoral election — will shut down in the U.S. in February after the Commodity Futures Trading Commission said it failed to comply with market rules."

Economy

THE NOTHING-MAKES-SENSE ERA — NYT's Joe Rennison and Isabella Simonetti: "Stocks have roared back from their low in June, as investors bet that inflation has peaked, even as the Federal Reserve signals that its campaign to cool the economy by raising interest rates isn't over … Rather than worry that a hot economy could embolden the Fed to raise rates more aggressively, investors appear to be choosing to focus on receding recession worries , particularly because many expect the pace of inflation to start to slow."

WATCH THIS SPACE — Our Nick Niedzwiadek: "State and municipal pension plans posted their worst annual performance since 2009 due to this spring's market selloff. The median plan lost 7.9 percent for the 12 months ending June 30, according to data shared with POLITICO Tuesday by investment analysis firm Wilshire Trust Universe Comparison Service."

DOWN BAD — Reuters's Manya Saini: "Several high-flying startups are being brought down to earth, as a recent carnage in global equity markets and lackluster demand for new listings force companies to raise funds at a substantial discount to their sky-high valuations. Easy money from venture capital dealmaking is fast evaporating in an inflation-induced high interest-rate environment as many private investors take a hard look at funding startups, many of which could be years away from turning a profit."

RETURN TO THE OFFICE CASUALTY — Bloomberg's Jonathan Roeder: " Salad chain Sweetgreen Inc. fell sharply in late trading after slashing its revenue forecast for the year, making it the latest consumer company to warn about weakening demand."

Crypto

FLAGGING INTEREST — WSJ's Paul Vigna: "Coinbase Global Inc. reported a surprisingly large second consecutive quarter of losses, driven by the crypto market's spring meltdown … The number of active users fell. Coinbase's monthly active users, which represents customers who make at least one trade in a month, fell to 9 million from a peak of 11.2 million in the fourth quarter of 2021."

INFLATION HEDGE — From Bloomberg's Immanuel John Milton: " Bitcoin slumps , erasing all of the prior session's gains and ending a four-day winning streak as crypto investors brace for Wednesday's inflation data."

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Fly Around

Two U.S. House Democrats on Tuesday proposed making it unlawful for airlines to offer flights if they know they lack sufficient staff or to cancel flights close to scheduled departures because of foreseeable staffing issues. — Reuters's David Shepardson

It turns out that Italians don't necessarily like pineapple on their pizza, after all. Or at least not enough to keep nearly three dozen Domino's Pizza franchises afloat . Last month, the Italian outlets of the American pizza conglomerate extinguished their pizza ovens. — NYT's Elizabeth Povoledo

In a world increasingly troubled by the persistent harm that plastic — manufactured in petrochemical plants — has had on the environment, companies are investing billions of dollars to ramp up production of plastics made from natural, renewable materials that can be safely composted or can biodegrade under the right conditions. – Associated Press's Mark Gillispie

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