US: July inflation prompts the Fed to re-think a 75 bps rate hike – UOB

Senior Economist at UOB Group Alvin Liew reviews the latest US inflation figures and the impact on the Fed’s rate path in the near term.

Key Takeaways

“Both key measures of US inflation came in below expectations for Jul. US headline consumer price inflation was still elevated but came off from recent highs,  to 8.5% y/y in Jul (from 9.1% y/y in Jun), below Bloomberg estimates of 8.7%. On a m/m basis, the headline CPI was flat at 0% in Jul (versus 1.3% in Jun, and 1.0% in May), below Bloomberg estimates of 0.2% m/m.”

“Core CPI inflation (which excludes food and energy) remained elevated, holding at 5.9% y/y in Jul, unchanged from Jun, but it was nevertheless below Bloomberg estimate for a higher 6.1% print. On a sequential basis, core inflation rose by 0.3% m/m in Jul (easing from 0.7% m/m in Jun, and below Bloomberg estimate of 0.5%).”

“While US headline inflation has retreated below 9% in Jul, this reflected mainly the decline in gasoline prices but the cost of living is still painfully high as shown by the persistent rise of food and shelter costs. We maintain our headline CPI inflation forecast to average 8.5% and our core CPI inflation forecast at 6.5% for 2022. Subsequently, we still expect both headline and core inflation to ease in 2023 to average 2.5%. The balance of risk on inflation remains on the upside.”

“Our FOMC Outlook: We still expect a 50 bps rate hikes in Sep, followed by another 50bps in Nov FOMC before ending the year with a 25bps hike in Dec. Including the rate hikes of 25bps in Mar, 50bps in May and the latest hikes of 75bps in Jun and Jul, this implies a cumulative 350bps of increases in 2022, bringing the FFTR higher to the range of 3.50-3.75% by end of 2022. We note that there will be quite a few events along the way to Sep that may still sway the Fed decision/shape Fed expectations, including another jobs report (2 Sep) and the Aug CPI inflation report (13 Sep) as well as Jackson Hole Symposium (25-27 Aug).”