September 14, 2022

Topics shared in this publication are:

  • Headline CPI decelerated to 8.3%, down from a peak of 9.1% in June 2022. The sharp decline in energy prices in August were the key reason for that decline.
  • Core CPI nudged up, uncomfortably to 6.3%, within a whisker (technically, two whiskers) of the 6.5% peak back in March 2022.
  • The Fed’s preferred index, the personal consumption expenditures (PCE) price index, moved lower to 6.3%y/y  in July. That merits higher rates from the Fed, but PCE is tamer than CPI. The divergence between the two indices is at a 41-year high.
  • Several consumer categories have slowed as households pull back on spending. But supply disruptions keep auto prices elevated, and shelter related inflation measures continue to remain firm, as they respond with a lag to slowing housing activity.
  • We expect continued deceleration in 2022, due to several factors. They include reduced consumer savings and slower spending on goods as well as low consumer sentiment.
  • We also expect productivity growth from firms that invested heavily in new technology to have a downward impact on inflation going forward.
  • Upside risks come from boosts to commodity prices (energy, agriculture, metals) as a result of the Ukraine war, strong demand for consumer services, and persistently high readings for housing costs.
  • Wage pressures also remain a risk, with average hourly earnings ticking up in August and the employment cost index firming in the second quarter.
  • We expect inflation to decelerate, coming down to 7.1%y/y by year end and further deceleration to 3.0% by August 2023.

Luke Tilley


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