Last month, America’s soaring price hikes slowed, indicating that inflation may have peaked. However, another trend that investors should be aware of is the spread of higher prices across more sectors of the economy.
What’s going on: According to the Bureau of Labor Statistics, consumer price inflation remained high in July. Prices increased 5.4 percent year over year, but were unchanged from June, when the index reached a 13-year high.
However, prices rose 0.5 percent on a monthly basis in July, a significant slowdown from June’s 0.9 percent increase and the slowest pace since February.
However, delve deeper into the data. While the cost of some goods, such as medical care, housing, and food in grocery stores and restaurants, decreased last month, the cost of other goods, such as medical care, housing, and food in grocery stores and restaurants, increased.
“The annual rate of inflation has seemingly peaked, but the details show a broadening out of price pressures,” chief international economist at ING, James Knightley wrote in a note to clients. “This indicates inflation is likely to be more persistent and pervasive than predicted by the Federal Reserve.”
For the time being, investors are optimistic. On Wednesday, the S&P 500 (SPX) and Dow (DJX) hit new all-time highs, while 10-year US Treasury yields fell as traders bet the inflation data would relieve the Fed’s pressure to raise interest rates and reduce asset purchases sooner than expected.
Eco nomics 101: The latest inflation reading doesn’t change the fact that America’s “stimulus fuelled economy is booming,” according to Knightley. “Demand is outpacing the supply capacity of the economy given the scarring that the pandemic has caused as evidenced in production bottlenecks and labour shortages,” he said.
Wages are being pushed up by competition for workers, while supply chains are being stressed by record low levels of raw materials supply, order backlogs, and extended delivery times.
“Costs are increasing throughout the economy and the strength of demand means that companies have a sense of more pricing power [than] they have experienced in years,” Knightley added.
The proportion of companies raising prices and expecting to raise them further in the coming months is at a 40-year high, according to data from the National Federation of Independent Businesses. “As a result, major inflation declines appear unlikely in the near future,” Knightley concluded.
The White House is concerned about rising prices as well. On Wednesday, US National Security Adviser Jake Sullivan urged OPEC+ to boost oil production to lower gasoline prices.
“President Biden has made clear that he wants Americans to have access to affordable and reliable energy, including at the pump,” Sullivan said in a statement, adding that the US government is “engaging with relevant OPEC+ members on the importance of competitive markets in setting prices.”