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When the latest data on consumer prices in the United States landed Wednesday, the headline number was ugly.
Inflation surged to 9.1% in June, according to data from the Bureau of Labor Statistics. That was higher than economists polled by Refinitiv were forecasting.
It was also much higher than the 8.6% rate logged in May, which rattled financial markets and pushed the Federal Reserve to hike interest rates more aggressively — renewing fears about whether the central bank could tame inflation without triggering a recession.
Investors were bracing for a surprise. But there’s reason to believe that Wall Street’s response to the numbers will be more muted than it was last month.
“Both policymakers and investors will take this new high in stride,” Joseph Brusuelas, chief economist at RSM US, told me.
Why? Digging deeper into the data on inflation reveals that while the situation is worrying, there are some reasons for optimism.
1. Core inflation. Annual core inflation, which strips out volatile food and energy prices, appears to have peaked in March. Federal Reserve officials are most concerned when there are signs inflation is broad-based, so this provides some hope the underlying situation is improving even as grocery and gas prices go haywire.
Core inflation in the 12 months to June edged down to 5.9% from 6% in May. It could keep dropping should consumer demand for goods continue to soften, as shoppers balk at high prices and redirect their income towards services like dining out.
2. Oil prices. Concerns about whether the global economy could tip into a recession have dimmed expectations for fuel demand, helping relieve pressure on gasoline prices in the United States this month. The average price for a gallon of regular gas on Wednesday was $4.63, compared to $4.78 a week ago and $5.01 one month ago.
That wasn’t reflected in the June data, given that gasoline prices were at a record high when the Bureau of Labor Statistics crunched the CPI numbers. The gasoline index rose 11.2% between May and June.
But it does mean July will probably look better — and markets like to look ahead.
3. Long-term inflation expectations. A survey from the Federal Reserve Bank of New York published this week showed that while consumer inflation expectations for the next year marked a new high in June, expectations for the medium and long term declined.
This indicates that American consumers still have faith that the Fed can get the inflation situation under control by hiking interest rates and ending crisis-era bond purchases. The economy might slow, but price stability will ultimately be restored, as will the much-maligned credibility of central banks.
That said: Core inflation is still extremely high and well above the central bank’s target of near 2%. On a month-over-month basis, it appears to be accelerating, which is bad news. And there are signs that inflation pressures are spreading to parts of the economy where they’re likely to stick around for some time, like housing and rent.
The shelter index climbed 5.6% over the last year. That was the biggest increase since February 1991. The price of household furnishings jumped 9.5% during the same period, while airline fares leaped more than 34%.
Looking ahead: Once inflation starts to come down, will it ever get back to where it was before the pandemic hit?
Top officials, including Federal Reserve Chair Jerome Powell and Agustín Carstens, who heads up the Bank for International Settlements, acknowledged at a summit in Portugal late last month that there’s a risk we could enter a period of persistently higher inflation if central banks don’t get the situation under control soon.
“The biggest question, I think, is are we in transition from a low inflation regime to a high inflation regime?” Brusuelas said.
Oil prices take center stage as Biden travels to Middle East
When President Joe Biden arrives in the Middle East on Wednesday, he’ll be trailed by the specter of high oil prices, which pose a growing political liability to the White House.
But recent market moves could reduce expectations for the trip. Global oil prices slid 7% on Tuesday to less than $100 a barrel and have pulled back 13% so far this month. US oil prices have dropped below $96 a barrel, dipping more than 9% in July.
The International Energy Agency on Wednesday reduced its outlook for global oil demand this year, pointing to “higher prices and a deteriorating economic environment.” Meanwhile, some supply constraints have been eased by ongoing access to barrels from Russia.
Still, the Paris-based agency warned of huge unknowns ahead.
“Rarely has the outlook for oil markets been more uncertain,” it said in its monthly report. “A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side.”
Much of the recent slide in prices has been tied to the risks of China’s “zero Covid” policy. While major cities have been relaxing harsh restrictions, growing case numbers and the emergence of a highly infectious Omicron subvariant in Shanghai have spurred fears of a return to mass lockdowns.
China is the world’s second largest consumer of oil after the United States. The country’s crude imports fell sharply in June compared to May, according to government data released this week.
What happens next: Biden isn’t off the hook. Given market constraints, it’s likely oil prices don’t have much room to fall much further. That means it would still help the United States if countries like Saudi Arabia and the United Arab Emirates pumped more, making use of whatever remaining spare capacity they have.
“I think there is a high floor,” Rohan Reddy, director of research at Global X ETFs, told me. “There’s just not enough supply right now.”
Twitter needs just 4 days to make its case against Musk
Twitter (TWTR) has officially sued Elon Musk in an effort to compel him to follow through with his deal to buy the social media company — and its team of lawyers doesn’t think it needs long to state its case.
In a lawsuit filed in the Delaware Court of Chancery on Tuesday, Twitter’s legal counsel requested a four-day trial on the dispute to be completed in September.
“Expedition is essential to permit Twitter to secure the benefit of its bargain, to address Musk’s continuing breaches, and to protect Twitter and its stockholders from the continuing market risk and operational harm resulting from Musk’s attempt to bully his way out of an airtight merger agreement,” the company said in its filing.
My thought bubble: Twitter knows speed is of the essence to get the company back on track and reduce the huge uncertainty now hanging over its stock.
Shares regained around 4% on Tuesday after falling sharply on Monday, but they’re still trading 37% below Musk’s offer price, suggesting deep skepticism that the deal will get done — at least at its original price.
Delta Air Lines (DAL) reports results before US markets open.
Also today: The Consumer Price Index for June arrives at 8:30 a.m. ET.