U.S. Inflation Predicted to Fall Sharply by truflation

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The U.S. will announce another sharp drop in inflation when the latest monthly data are dropped tomorrow says Truflation, an independent real-time inflation data aggregator.

Downward pricing pressures are expected to be reported by several key sectors of the U.S. economy including utilities, clothing, and healthcare.

Truflation predicts a headline reading of 3.1% to be announced although its own measure which relies on 'real time' assessments of price movements in the economy puts the true rate of inflation lower than this.

Indeed, as of July 11, 2023, truflation's CPI index is sitting at 2.45%.

The official U.S. inflation reading is due for release at 13:30 BST and truflation's prediction of 3.1% sits at the midpoint of market expectations, which range from 2.9% to 3.4%.

"While inflation, as reported by the Bureau of Labor Statistics (BLS), remains higher than truflation's CPI index, it is encouraging to see the official number approaching our own estimate," says Oliver Rust, head of product at truflation.

Rust says a decline to 3.1% would mark another "giant leap" towards the Federal Reserve’s 2% target, down almost an entire percentage point from the previous month's 4%.

Yet the market is still looking for the Federal Reserve to raise interest rates at least on one further occasion in July, with another hike potentially coming in September.

Any further hikes will however depend on the outcome of Wednesday's reading, making it of significance for financial markets and the U.S. Dollar.

An undershoot on market expectations would potentially lead markets to bet just one further hike is likely, which would weigh on yields and the Dollar as bets on a September move retreat.

"Given such a dramatic decline in inflation over recent months – it would be easy to assume that the Fed will continue holding interest rates at current levels. However, the market is overwhelmingly expecting another 25bps hike at the next FOMC meeting on July 25-26. Indeed, it appears that this month’s inflation data will have little bearing on the Central Bank’s next move," says Rust.

The Fed is expected to hike further thanks to a run of above-consensus labour market surveys and official data releases from June and July which has raised policymaker concern that ongoing resilience in the labour market will maintain upward pressure on domestic inflation, requiring further interest rate hikes to quell activity.

The Fed is now expecting unemployment to end the year at 4%, down from its previous prediction of 4.1%.

"However, it's worth noting that this prediction is based on lagging indicators from the Department of Labor which fail to reflect the current situation on the ground," says Rust.

He cites some employment indicators that suggest small and medium enterprises are already buckling under the pressure of higher interest rates, while layoffs are on the increase.

"Overall, the US consumer may be in worse shape than the government is acknowledging, and this is set to continue at least until the end of 2023," says Rust, adding:

"After an aggressive hiking cycle, the US economy may well have reached a tipping point, even if this is not reflected in official figures yet. Against this backdrop, the Fed continues to face a delicate balancing act, and a decision to hike rates again this month will no doubt make a significant contribution to accelerating a recession."