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Moderate Inflation Data Expected on Thursday, But Fed Remains Cautious

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Understanding the Current Inflation Landscape and Its Impact on the Economy

Consumer Price Index: A Closer Look

As of August 6, 2023, gas station signboards in Bethesda, Maryland, and across the country, reflect the ongoing impact of inflation on everyday life. The upcoming consumer price index (CPI) report is projected to show a slowing pace of price increases. However, this deceleration may not be significant enough to cause the Federal Reserve to relax its efforts to combat inflation. If the consensus from Wall Street, as measured by Dow Jones, holds true, the CPI, a key indicator of inflation, will reveal a monthly increase of 0.2% for July, and a 12-month rate of 3.3%. These figures are significantly lower than the 8.5% annual rate recorded a year ago, which was the highest in over four decades. Excluding food and energy, the monthly estimate remains at 0.2%, but the 12-month rate is expected to be 4.8%.

The Silver Lining: Easing Inflationary Pressures

While these numbers may seem daunting, they do indicate a slight improvement. Various data points suggest that inflationary pressures have considerably eased from their peak in 2022. However, history has shown that inflation can be persistent and may linger longer than anticipated, especially when it becomes deeply rooted. The current inflationary cycle continues to impact consumers, as evidenced by the nearly 19% increase in the CPI since its lowest point in April 2020, during the early stages of the Covid-19 pandemic. Mark Zandi, Chief Economist at Moody's Analytics, believes that inflation is moving in the right direction, but cautions against overconfidence.

Future Projections and Potential Challenges

Zandi agrees with the consensus on the CPI estimate and anticipates inflation to continue its downward trend, possibly aligning with the Federal Reserve's 2% annual target by 2024. Certain factors support this outlook. For instance, housing-related costs, which constitute about one-third of the inflation index weighting, are on the decline. There are also indications of slowing wage growth. The employment cost index, a critical measure of inflation for the Fed, showed a 4.6% increase in the second quarter, down from a record peak of 5.7% during the same period in 2022. However, Zandi also points out potential risk factors. Health insurance costs are predicted to rise as a statistical adjustment used by the Bureau of Labor Statistics expires. This adjustment has led to a 24.9% decrease in the health insurance component of the CPI over the past year, a trend that is expected to reverse. Furthermore, gas prices have surged this summer, with the cost of U.S. crude oil rising nearly 16% in July.

Implications for Interest Rates and the Federal Reserve's Response

Despite these challenges, Zandi believes that the recent trends should persuade the Federal Reserve to halt further increases in interest rates. He suggests that if inflation continues on its current trajectory, it should be sufficient to convince the rate-setting Federal Open Market Committee to stop raising rates. However, he also notes that the threshold for lowering rates is high, as inflation remains a concern and is still above target. The Federal Reserve will likely wait until they are absolutely certain that inflation is on track to reach its target before they consider reducing rates. Former Fed Governor Richard Clarida, now a global economic advisor for asset management giant Pimco, expresses a different view. He believes that the Fed should continue its current rate-hiking cycle, which started in March 2022 and has led to 11 increases totaling 5.25 percentage points. According to Clarida, it's crucial for the Fed to convey that they are still committed to combating inflation.

The Broader Economic Impact and Public Sentiment

On a macro level, the Fed's rate hikes seem to have caused minimal damage. After a decline in the first two quarters of 2022, GDP has remained positive and is currently tracking at a 4.1% annualized growth rate in the third quarter. However, many Americans are still dissatisfied with the state of the economy, resulting in a low approval rating of just 39% for President Joe Biden in the latest CNBC All-America Economic Survey in July. This dissatisfaction can be attributed to the more significant impact of elevated inflation levels and rate hikes on the micro-economy, such as small businesses and household debt levels. Patrick Reilly, co-founder of Uplinq, a global credit assessment platform for small business lending, points out that many people rely on credit card and home equity lending when starting a small business. He notes that credit card interest rates have been rising slightly faster than federal funds, and banks have been tightening credit criteria.

Looking Ahead: Potential Trends and Market Reactions

Reilly warns that rate hikes and loan default rates for small businesses typically rise together, leading to a credit crunch that could continue. He argues that the Fed's actions are effectively putting small businesses out of business, stifling innovation and growth. However, if economic data continues to improve, the Fed may be able to ease its monetary policy. Regional presidents John Williams of New York and Patrick Harker of Philadelphia have both indicated this week that they are considering ending the rate increases. The decision will largely depend on data points such as the CPI reading. The upcoming report and the state of inflation will be scrutinized, with particular attention paid to the shelter and healthcare components, as well as energy and food. Trends in core services will also be closely watched, along with more specific items like appliances. For instance, Bank of America has noted that real-time data shows retailers are reducing prices across categories for large appliances. The bank's measure of prices for this category has decreased by 5% so far this year, which could indicate a broader trend of easing inflation. Despite these positive signs, markets remain somewhat apprehensive. A bond market measure of inflation pricing, known as a

Hot Take: The Impact of Inflation on New Businesses

The current inflation landscape presents a complex environment for new businesses. On one hand, the easing inflationary pressures and the potential halt in interest rate hikes could provide some relief. However, the persistence of inflation and its impact on various economic sectors cannot be ignored.

Challenges and Opportunities

New businesses, particularly those in sectors like health insurance and energy, must be prepared for potential cost increases. The anticipated rise in health insurance costs and the recent surge in gas prices are clear examples of inflationary pressures that could impact operational costs and profitability. On the flip side, the slowing pace of price increases and the potential alignment with the Federal Reserve's 2% annual target by 2024 could present opportunities. If inflation continues on its current trajectory, we could see a more stable economic environment conducive to business growth.
Adapting to a Changing Landscape
The key for new businesses is adaptability. Understanding the current inflation trends and potential future scenarios will be crucial in navigating this landscape. Businesses that can effectively manage their costs, adapt to changing market conditions, and seize opportunities presented by the evolving economic environment will be better positioned to thrive. In conclusion, while the inflation landscape presents challenges, it also offers opportunities for those who can adapt and innovate. The resilience and adaptability of new businesses will be tested, but with careful planning and strategic decision-making, they can navigate this complex landscape successfully. Article First Published at: https://www.cnbc.com/2023/08/09/cpi-inflation-report-for-july-high-prices-are-still-a-problem.html Brought to you by ChatGPT for www.BusinessFormation.io

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