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CPI Reveal Price Hikes Slowing Down

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The consumer price index (CPI) report for Thursday is expected to reveal that while price hikes are slowing down, they are not slowing down enough for the Federal Reserve to abandon its fight against inflation.

The carefully monitored consumer price index will show a monthly gain of 0.2% for July and a pace of just 3.3% over the past 12 months if the Wall Street consensus as determined by Dow Jones is accurate.

The latter figure is insignificant when compared to the 8.5% annual rate the CPI recorded a year earlier, which was barely below the highest level in more than 40 years. The monthly estimate is 0.2% when food and energy are excluded, while the 12-month rate is estimated to be 4.8%.

That is true if it sounds like at least somewhat positive news. Several data points suggest that inflationary pressures have subsided significantly from their levels in 2022.

But as history has demonstrated, once inflation picks up steam and becomes established, it may be persistent and stay longer than anticipated. Yet the CPI has increased by almost 19% since bottoming out in April 2020, during the early stages of the Covid pandemic, indicating that the current round is still having an effect on consumers.

“We can feel confident that inflation is moving in the right direction,” said Mark Zandi, chief economist at Moody’s Analytics. “But I don’t think we should be overly confident.”

In line with the general agreement regarding the CPI estimate, Zandi anticipates that inflation will decline and may perhaps reach the Federal Reserve's 2% annual objective by this time in 2024.

Housing expenses, for instance, which account for nearly one-third of the inflation index weighting, are declining. There are also hints that wage growth is slowing down. A data set dating back to 2002 revealed that the employment cost index, a crucial Fed inflation indicator, increased by 4.6% in the second quarter, down from an all-time high of 5.7% from the same period in 2022.

The costs of health insurance, for example, are anticipated to start increasing now that a statistical adjustment the Bureau of Labor Statistics uses is set to expire. But, Zandi also sees warning flags. The CPI's health insurance component had fallen by 24.9% during the previous year before being adjusted, but that decline should now be reversed.

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