- Capital Economics’ Paul Ashworth claims that the US is experiencing a “disinflationary wave”.
- He stated that falling fuel and food prices would cause headline inflation to drop soon.
- This would allow Federal Reserve to shift to smaller rate increases, which could boost stocks.
A Capital Economics strategist stated that the Federal Reserve will soon have the ability to raise interest rates less aggressively if the US experiences periods of disinflation.
The chief US economist of the research firm predicted that falling fuel and food prices would cause headline Consumer Price Index prints in 2022 to drop.
Paul Ashworth, a researcher, stated Tuesday that if it is true that inflation will soon fall back, officials will quickly change to much smaller increases. “Over the next month, headline CPI will be affected by the continued fall in gasoline prices and the ease of food inflation.”
According to the EPA, average national gas prices are now at $3.68 per gallon. They were over $5 in June when they topped out. AAA. Some economists claim that food prices have also peaked. Others, however, suggest that there is still a lot of room for improvement. US shoppers will experience further pain.
August’s Markets rattled by 8.3% inflationAfter missing economists’ expectations, the 0.2 percentage point difference. Ashworth stated that the most recent batch of data showed some positive news, which suggested that supply-chain problems are easing.
He wrote that “despite the higher-than-expected 0.6% increase in core prices in August”, there were still signs of inflation. “Supply shortfalls have stabilized, and our product shortages indicator now suggests that core goods inflation could drop back to 2% by the end of this year, from the 7% recorded in August.”
Ashworth said that there are more signs of deflation in services, including falling hotel rates and airfares. However, the plunge in long-term inflation expectations has markedly decreased the risk of a price spiral. “The result is that we expect more convincing indicators of a decline in inflation in CPI figures in the near future.
Inflationary pressures may allow the Fed to relax its rate-hiking programme. Ashworth predicts that the US central banks will adopt a more flexible approach to tightening their monetary policies after Wednesday’s September meeting.
“Fed fund futures suggest that rates may peak at near 4.50%. That’s more than 125 base points of additional tightening, compared to what was price in July’s meeting,” said he. These expectations are higher than our projections, primarily because we expect inflation will drop more.
