United States: is inflation weakness only temporary?

Chart of the week

June’s inflation figures marked the second highest monthly rise in the core rate, which strips out food and energy, for a decade. The Consumer Price Index (CPI) climbed 0.29%, boosting the annual rate from just under 2.0% to just over 2.1%.  The rise comes after four straight months of falls with prices for consumer goods including used cars, home furnishings and clothing, previously a drag, now turning back up. Healthcare and accommodation were also firmer for the month.

OUR ANALYSIS

The Core Personal Consumption Expenditure deflator (Core PCE inflation), which the Fed watches closely, had already started to recover, posting two strong readings in April and May.

It is not unknown for the deflator and CPI to diverge, which has been the case recently. However, the categories that have dragged down prices in recent months correlate well across both data series and their strong rise in June’s CPI reading suggests that the deflator, which will be published at the end of July, will also come in strong.

A third reading in the region of 0.2% would confirm that the inflation slowdown reflects only temporary weakness. Inflation could pick up sharply at the start of 2020 and potentially complicate matters for the Fed: weaker inflation is one of its arguments to justify an expected move towards softer monetary policy.

 

The opinion expressed above is dated July 11th, 2019, and liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.


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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée