July 15, 2024
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Markets Surged by Good Inflation News! Will the Trend Continue?

Markets Surged by Good Inflation News! Will the Trend Continue?

As the Bureau of Labor Statistics delivers heartening news for the second month in a row, evidence indicates that inflation is finally showing signs of slowing down substantially. In June, the consumer price index dipped by a tenth of a percentage point, dropping the CPI inflation rate for the past year to 3%, the lowest it has been since June of the previous year. However, this rate still exceeds the Federal Reserve’s inflation target of 2% by a full percentage point.

Despite the media’s positive spin on the recent data, it is crucial to remember that this is only the second consecutive month of encouraging news. While anticipation for a September rate cut has increased among investors, Treasury futures may be jumping the gun once again. The data from May and June, while noteworthy, are not sufficient to declare an end to the severe inflation crisis that has plagued the economy for the past 40 years.

  1. Deflation is not Uniform
    • The recent deflation in prices primarily stems from specific sources, such as a 4% drop in energy prices and a 7.4% decrease in gasoline prices.
    • Although the core CPI rose slightly, the decline in gas prices impacts transportation services, one of the few core CPI categories experiencing deflation, alongside the struggling auto market.
  2. Temporary Relief in Gas Prices
    • A temporary drop in consumer demand and a strategic release of a million oil barrels into the market by President Biden caused a brief decline in gas prices.
    • Despite this respite, AAA predicts that gas prices will resume their upward trajectory soon.

The auto market continues its decline due to a combination of recovered supply chains post-pandemic and exhausted consumer demand for high-end vehicles bought during the peak of the 2020 lockdowns with saved stimulus money and unspent wages.

The Federal Reserve exercises caution for two main reasons: the need for more time to ascertain if this disinflation trend will endure and the persisting high service prices, a crucial component of the inflation equation. Despite indications that shelter inflation slowed in the previous month, experts like E.J. Antoni argue that the BLS underestimates the actual housing inflation experienced by consumers.

E.J. Antoni highlights discrepancies in the BLS housing inflation measure, which fails to consider the new record high home prices in June and the constant 7% interest rates, instead focusing solely on rents with a significant lag.

While we are encouraged by two consecutive months of unambiguous positive news, it is essential to remember that a true trend is not established in such a short timeframe. Investors must be cautious not to selectively interpret data to fit their desired narrative. Overall, a vigilant approach is necessary to truly understand the complex landscape of inflation and economic recovery.

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