Great News on Inflation, but Markets Are Getting Ahead of Themselves

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Once again, markets are taking the elevator while economic data takes the stairs. That is, it is good that markets initially reacted so well to the better-than-expected news on July’s Consumer Price Index (CPI) inflation number, and they may think that, because of such numbers, the Federal Reserve (Fed) is done with its interest rate campaign. However, the Fed had even better news in July, but they decided to increase the federal funds rate anyway. Furthermore, the picture for headline inflation going forward is not looking pretty, to say the least, as gasoline prices have increased considerably, and they have an outsized effect on inflation expectations.

According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting, headline inflation is expected to come in at 0.77% in August while its forecast for core inflation is expected to be 0.38%. If this is correct, it means that year-over-year inflation for August will go up to 3.81% from a 3.2% reading in July. The CPI release for August will come in on September 13, while the Federal Open Market Committee (FOMC) meeting is scheduled for September 19-20, at which time the FOMC will release its updated Summary of Economic Projections as well as its corresponding updated ‘dot-plot.’

Inflation expectations and gas prices

We don’t want to be the market’s party poppers but if this information makes Fed officials decide to remain complacent regarding inflation, it is not going to look good on Federal Reserve FOMC members' curriculum vitaes. And economists, including yours truly, have big egos, and they would not want to be remembered in the same vein as Fed members during the 1970s and early 1980s. Thus, we still believe that the Fed is going to go, at least, once more before the end of this year, which would put the current celebration in jeopardy once again.