US inflation rose in July for the first time since June 2022 year on year, driven by house prices, but is expected to continue its downward trend in the coming months.
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Inflation settled at 3.2% year-on-year in July, up from 3.0% in the previous month, according to the CPI index released by the Labor Department on Thursday. However, according to the Market Watch consensus, analysts were expecting a slightly stronger rebound to 3.3%.
And over a month, inflation is expected to be stable at 0.2%.
“The housing index was by far the main factor (…) and accounted for more than 90% of the month-on-month increase,” explains the Department of Labour, adding that car insurance prices also contributed.
On a positive note, however, underlying inflation, which excludes energy and food prices, slowed further to 4.7% over a year from 4.8% and remained stable at 0.2% over a month.
This measure is seen by economists as a more meaningful signal of the direction of inflation.
“Underlying prices are moving in the right direction,” notes Rubeela Farooqi, an economist specializing in high-frequency economics, in a note.
She stressed that this is “good news” for US Federal Reserve officials, who are on the front line in the fight against inflation and who could stop raising interest rates but maintain “restrictive policies” for some time to come. maintained could “bring prices back towards target” of 2.0% over 1 year.
The Fed favors another measure of inflation, the PCE index, whose July data will be released on August 31st.
The New York Stock Exchange opened higher on Thursday, recovering from two consecutive declines and welcomed the fact that inflation failed to beat expectations.
These figures show “that our economy remains strong. “Annual inflation has fallen by about two-thirds since last summer,” President Joe Biden, who is traveling to the US Southwest to promote his economic and industrial policies, said in a statement.
Indeed, the pace of inflation has slowed significantly from the peak of 9.1% yoy recorded in June 2022, the highest since the early 1980s.
And July inflation offers “convincing new evidence that inflationary pressures are abating,” says Lydia Boussour, economist at EY-Parthenon.
“We have clearly passed the peak of inflation on the real estate front (…). Real estate disinflation will accelerate in the coming months,” she explains.
The Fed has hiked rates 11 times since March 2022 to raise borrowing costs and slow consumption and investment. The key interest rate is currently in a range of 5.25 to 5.50%.
And officials are divided on whether or not to raise interest rates further at the next meeting on September 19-20.
Because the risk is to slam on the brakes too hard and trigger a recession. However, this scenario appears to be avoidable, whereas a few months ago it seemed inevitable. Nevertheless, a strong economic slowdown is expected for the end of 2023 and the beginning of 2024.
“We think the Fed is done raising rates in this tightening cycle, but won’t cut rates until early next year,” said Ryan Sweet, economist at Oxford Economics.
And at a time when major economies are battling inflation, China slipped into deflation (prices fell) in July, weighed down by sluggish domestic consumption that hampered economic recovery.