US: CPI remains high

The CPI, which will be announced today, stands out as the most important data, even though the Fed is acting according to the PCE. CPI, which is expected to remain at 8.3% annually with an increase of 0.7% on a monthly basis, is expected to decline to 5.9% on a core basis (excluding food and energy). If the Fed is to act according to these rates, the details are as important as the direction of the data, and there is a need to see a recovery in non-energy items. The fact that the CPI remains high will increase the expectation that the Fed will raise interest rates without hesitation.

The May CPI is likely to reveal that we are not far from the peak of inflation. Gasoline prices, which had increased last month, continued to rise in June, showing that the easing in April was temporary. Signs point to a decrease in prices for some core goods as demand cools. The rise in energy and food costs, on the other hand, removes the moderation level of core goods prices. The extension of the increases in gasoline prices to June shows that the strong trend in CPI will continue in the next month.

Demand, which remains flexible and active, will continue to exert upward pressure on services inflation. The recent increase in sanctions against Russia is still a phenomenon that will keep the high price pressure from external factors active, and this causes us to be hesitant about easing inflation from the peak.

Housing inflation will be affected by mortgage rates as well as demand. Therefore, it is a phenomenon that we can expect now that the rising mortgage interest rates will reduce the demand for housing and loosen the prices. At the same time, price pressures on consumer goods, which are subject to discretionary expenditures, will follow a more balanced course. We will see the disinflation effect on the goods inflation side, but the demand-boosted services inflation currently does not dampen the overall rate of increase much.

Of course, Fed/Powell will not look at the data from a narrow point of view. Therefore, softening in an item like energy alone will not make any sense. If the policy ground causes inflation to remain high, the Fed will increase interest rates, at which point the 50 bps increase rates after July will be the main pricing and highlight phenomenon. Even as smoother supply chains allow core goods prices to fall, strong service momentum – will keep inflation uncomfortably high and pave the way for the Fed’s 50bp hikes for the next few meetings.

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