Inflation Likely to Dominate the Economic News This Week | CPT PPP Coverage

The positive inflation story is about to get a plot twist.

Analysts expect that when the Labor Department reports the consumer price index number for July on Thursday, it may show inflation rose from June’s 3% annual rate to 3.2% or 3.3% because of “base effect” comparisons to last year when inflation had crested and was beginning to turn down.

And more surprises could follow when August’s inflation comes in as a late July spike in energy costs moves through the economy. Gasoline prices have now risen to a national average of $3.83, an increase of 50 cents from a month ago.

Economists have been warning that bringing inflation down to 2% annually – the stated goal of the Federal Reserve – may prove harder than getting it from the 9% of a year ago to its current 3%.

“Overall, the trend in inflation is more firmly on a downward path than at the start of the year,” said Sam Bullard, managing director and senior economist at Wells Fargo’s corporate banking unit. “The pandemic-era distortions affecting both supply and demand continue to gradually unwind, while higher financing costs and slower gains are squeezing consumer spending and making shoppers more price sensitive. But progress is likely to be bumpier and slower going than what the June and July CPI reports indicate.”

Bullard said that small declines in vehicle prices and travel costs will keep pressure on inflation metrics in the fourth quarter, even as falling rental and shelter prices finally begin to contribute to the price index.

“Meanwhile, the disinflationary tailwinds over the past year from lower energy prices and tamer food costs are fading,” Bullard added. “While headline inflation has made quick work of getting back to low single digits, the year-over-year pace is likely to get stuck around 3% through the end of the year.”

Friday will bring another report on inflation, this time at the wholesale level, when the producer price index for July is released. Expectations are for a slight dip in the annual rate to 2.2% from June’s 2.3% level.

Further complicating the inflation picture is that the economy has been doing better than both the Fed and economists had expected after interest rates rose dramatically beginning in March of 2022. Gross domestic product for the second quarter surprised to the upside at 2.4% annual growth rather than the consensus call for a 2% rate.

And the Federal Reserve Bank of Atlanta’s GDPNow model is currently at 3.9%, having been increased from the 3.5 estimate of late July. Last week’s report on employment for July came in a little softer than expected at 187,000 jobs, below the 200,000 forecast, but still showed a tight labor market.

“This is the slowest jobs report since 2020!” Julius Probst, labor economist at Appcast, said on Friday. “Over the past three years, we have seen extremely volatile jobs reports. Employment first plunged in 2020, but then recovered at an extremely rapid pace.”

“Several jobs report numbers throughout 2021 and 2022 exceeded half a million,” Probst added. “And now – the U.S. economy is already basically at full employment. With record-low unemployment rates and high prime age participation rates, drawing more workers into the labor force will become more difficult. Red-hot gains are no longer necessary – the jobs market is already very strong.”

But the month-to-month fluctuations obscure a broader trend, whether it is inflation, the labor market or economic growth.

“I think the economy is resilient but we’re definitely going to see some normalization,” says Amy Dinkar-Patel, head of commercial distribution and specialty banking groups at TD Bank Group. “It’s actually remarkable what our economy can withstand.”