US inflation is likely to remain high despite falling gas prices. Here's why

Despite inflationexpected to remain painfully high for months, Americans may finally be coming out of a relentless price hike I can't.

Thanks in large part to falling gas prices, the government's July inflation report due Wednesday morning will see prices jump 8.7% year-on-year. Expected — Still at a blistering pace, but slowing from June's 40-year high of 9.1% year-on-year.

If economists' forecasts are correct, it would raise hopes that inflation has peaked and price inflation is beginning to ease slightly. There are other hopeful signs that the pace of inflation may be slowing.

At the same time, a series of other economic developments threatens to continue to build inflationary pressures. The pace of hiring is strong and average wages are rising sharply.

Read More: Food prices cool as demand soars

Even as gasoline prices fall, inflation in services such as healthcare, rent, and restaurant meals is accelerating. Prices for services are persistent and tend not to ease as quickly as gas, food, and other commodities. These trends suggest that overall inflation may not fall significantly any time soon.

President Joe Biden has already seen falling gas prices and his policies, such as releasing oil from the nation's strategic reserves, hurt households, especially low-income households. It points out that it shows that it is helping to deal with high costs. income household.

Nonetheless, Republicans will push ongoing high inflation in this fall's election as a top campaign issue. Polls show that high inflation is sharply eroding Biden's approval ratings.

On Friday, the House is poised to give Congress final approval for a tax and climate change revival package pushed by Rep. Biden and Democrats. The bill, which aims, among other things, to ease drug prices by allowing the government to negotiate Medicare drug costs, is expected to cut the federal budget deficit by his US$300 billion over a decade.

But economists say the measure, dubbed the Inflation Reduction Act by its proponents, will have minimal impact on inflation over the next few years, but this decade after his could delay inflation a little longer.

Trending Stories

The Economist Inflation reports from FactSet show consumer prices rose 0.2% from June to July. That would mean a sharp drop from his 1.3% jump in May-June.

However, so-called core inflation is likely to remain high, with the exception of the volatile food and energy categories. Economists expect core prices to rise 0.5% from July, down from a 0.7% gain in June, but still surge. Such gains will see core prices rise 6.1% y/y, up from 5.9% y/y in June.

If overall inflation eased in July, it would largely reflect a 16% decline in gas prices from their peak in mid-June. It dropped to about US$4.20 and was just US$4.03 on Tuesday. Continued declines mean lower gas prices are likely to further depress inflation in August.

READ MORE: Impact of High Interest Rates on Canadian Condo Demand

More items may also have contributed to the decline July price increases: Food costs are likely to continue to rise, but probably at a slower pace than in June. Prices for used cars, clothing, and rental cars may also be falling.

Federal Reserve Chairman Jerome Powell announced a series of said it needed to see a decline in its monthly core inflation rate. increase. The Federal Reserve tracks another inflation indicator more closely, but it also monitors the numbers in Wednesday's report known as the consumer price index.

The Fed has raised benchmark short-term interest rates in the last four rate-setting meetings, including his three-quarter point hikes in both June and July. This is his first major raise since 1994. July's blockbuster jobs report released by government on Friday — 528,000 jobs added, wages up, unemployment hit 3.5%, lowest in half-century — Solidifying expectations that the Fed will release yet another report. A 3/4 percentage point rate hike at the next meeting in September.

Financial markets expect the Fed to hike rates in the 3.5-3.75% range several more times this year, but will eventually be forced to cut rates by next summer. . recession.

Some trends point to lower inflation in the future. Supply chain problems with rising prices for cars, furniture, appliances and other commodities are easing.

According to Oxford Economics, the number of ships waiting to unload at the Port of Los Angeles/Long Beach has fallen for the sixth straight month. Overall, including services, are flat or declining, Oxford said, but remain high.

, lowering Americans' expectations of future inflation could also prevent price increases from taking hold. Such expectations can be self-fulfilling. If people believe that inflation will stay high or worsen, they are more likely to take action, such as demanding higher wages, which could result in higher prices in a self-perpetuating cycle. Companies often raise prices to offset rising labor costs.

But the American expects inflation to be lower in the next few years than he was a month ago, according to a survey released Monday by the Federal Reserve Bank of New York. Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said lower inflation expectations have prompted the Fed to see the economy still strong and inflation likely to remain high, including last month's job surge. He said they may react less positively to reports suggesting that

"This is a bit of a good sign," Ma said of the inflation expectations data. "Give them a little bit of room not to take a more aggressive approach."

© 2022 The Canadian Press