Evelyn Reynolds

July’s inflation data should provide signs that there’s at least some relief in the pipeline for an economy teetering on recession.
“The whole recession narrative really needs to be put on a shelf for now,” said Aneta Markowska, chief economist at Jefferies.
However, there were few other signs of inflation declines in the report, with food costs particularly high.

A shopping cart is seen in a supermarket as inflation affected consumer prices in Manhattan, New York City, U.S., June 10, 2022.
Andrew Kelly | Reuters

If inflation has been the biggest threat to U.S. economic growth, then July’s data should provide signs that there’s at least some relief in the pipeline.
Prices were flat for the month as gauged by the items that the Bureau of Labor Statistics tracks for its consumer price index. That marked the first time the aggregate measure hadn’t posted a month-over-month increase since May 2020, when the widely followed index showed a modest decline.

Just a month ago, CPI posted its fastest 12-month gain since November 1982, following a trend that helped send economic growth into contraction for the first half of the year, stirring up talk of a recession.
But with at least the short-term trend indicating the rate of price increases is abating, economic optimism is perking up.

No recession, for now

“The whole recession narrative really needs to be put on a shelf for now,” said Aneta Markowska, chief economist at Jefferies. “I think it’s going to be shifting to a stronger-for-longer narrative, which is really supported by a reversal in inflation.”
Markowska, whose forecasts this year have been accurate, sees solid growth in the near term, including a 3% growth rate in the third quarter. The Atlanta Federal Reserve’s GDPNow gauge, which tracks economic data in real time, pointed to a 2.5% growth rate in a Wednesday update, up 1.1 percentage points from its last one on Aug. 4.
However, Markowska also expects pressures to intensify in 2023, with a recession likely in the back part of the year.

Indeed, there was a little bit for both arguments in the CPI report.
Most of the tempering in inflation came because of a fall in energy prices. Gasoline slid 7.7%, the biggest monthly decline since April 2020. Fuel oil tumbled 11% as energy-related commodity prices were off 7.6%.

Transportation services cost increases also came off the boil, with airline fares tumbling 7.8% to reverse a trend that has seen tickets surge 27.7% over the past year.
But there were few other signs of inflation declines in the report, with food costs particularly high. The food index, in fact, rose 1.1% on the month, and its 10.9% pace over the past 12 months is the highest since May 1979.
That’s causing worries at places such as City Harvest, which helps feed needy New Yorkers who have been hit especially hard by price surge that began last year.
“We’re seeing many more children come into food pantries,” said Jilly Stephens, the organization’s CEO. “Food insecurity had been intractable even before the pandemic hit. Now we’re seeing even more people turn to food pantries because of the rising prices.”
Stephens said the number of children seeking food assistance about doubled a year after the Covid pandemic hit, and the organization is struggling to keep up.
“We’re always optimistic, because we are supported by incredibly generous New Yorkers,” she said.

People keep spending

Despite the surging prices, consumers have been resilient, continuing to spend even with inflation-adjusted wages contracting 3% over the past year.
Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending is at a healthy pace, rising about 10.5% over the past year, though inflation is influencing behavior.
“When you start to look at specific categories, there’s been a lot of shifting in spending, and as a result, some categories are being impacted more than others by inflation,” he said. “People are delaying their spending on discretionary items.”
For instance, he said department store spending has fallen 2.4% over the past year, while discount store spending has risen 17%. Amusement park spending is down 18%, but move theaters are up 92%. Some of those numbers are influenced by rising prices, but they generally reflect the level of transactions as well.
As inflation eases, Silver expects discretionary spending to increase.
“We believe there will be a spike later in the year that will create an upward slope to the spending in key categories where the consumer has been delaying and deferring spending,” he said. “Consumers may get a holiday present of some relief on food prices.”
In the meantime, the year-over-year inflation pace is still running at 8.5%. That’s just off the most aggressive rise in 40 years and a “worryingly high rate,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.
At the center of worries about global growth is the Federal Reserve and concerns that its interest rate hikes aimed at controlling inflation will slow the economy so much that it will fall into recession.
Following Wednesday’s report, traders shifted their bets to expecting the Fed to hike just half a percentage point in September, rather than the previous trend toward 0.75 percentage points, a move that Rieder said could be mistaken.
“The persistence of still solid inflation data witnessed today, when combined with last week’s strong labor market data, and perhaps especially the still solid wage gains, places Fed policymakers firmly on the path toward continuation of aggressive tightening,” he wrote.

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Prices that consumers pay for a variety of goods and services rose 8.5% in July from a year ago, a slowing pace from the previous month due largely to a drop in gasoline prices.
On a monthly basis, prices were flat as energy prices broadly declined 4.6% and gasoline fell 7.7%. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs.

Economists surveyed by Dow Jones were expecting headline CPI to increase 8.7% on an annual basis and 0.2% monthly.

Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared to respective estimates of 6.1% and 0.5%.

Even with the lower-than-expected numbers, inflation pressures remained strong.
The jump in the food index put the 12-month increase to 10.9%, the fastest pace since May 1979. Even with the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago. The energy index rose 32.9% from a year ago.
Used vehicle prices posted a 0.4% monthly decline, while apparel prices also fell, easing 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% for the month and 7.8% from a year ago.

Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average up more than 400 points and government bond yields down sharply.
Shelter costs, which make up about one-third of the CPI weighting, continued to rise and are up 5.7% from a year ago.

People shop at a grocery store on June 10, 2022 in New York City.
Spencer Platt | Getty Images

The numbers indicate that inflation pressures are easing somewhat but still remain near their highest levels since the early 1980s.
Clogged supply chains, outsized demand for goods over services, and trillions of dollars in pandemic-related fiscal and monetary stimulus have combined to create an environment of high prices and slow economic growth that has bedeviled policymakers.
The July drop in gas prices has provide some hope after prices at the pump rose past $5 a gallon. But gasoline was still up 44% from a year ago and fuel oil has increased 75.6% on an annual basis, despite an 11% decline in July.
Federal Reserve officials are using a recipe of interest rate increases and related monetary policy tightening in hopes of beating back inflation numbers running well ahead of their 2% long-run target. The central bank has hiked benchmark borrowing rates by 2.25 percentage points so far in 2022, and officials have provided strong indications that more increases are coming.
There was some good news earlier this week when a New York Fed survey indicated that consumers have pared back inflation expectations for the future. But for now, the soaring cost of living remains a problem.
While inflation has been accelerating, gross domestic product declined for the first two quarters of 2022. The combination of slow growth and rising prices is associated with stagflation, while the two straight quarters of negative GDP meets a widely held definition of recession.
Wednesday’s inflation numbers could take some heat off the Fed.
Recent commentary from policymakers has pointed toward a third consecutive 0.75 percentage point interest rate hike at the September meeting. Following the CPI report, market pricing reversed, with traders now anticipating a better chance of a lesser 0.5 percentage point move.
This is breaking news. Please check back here for updates.

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Food prices dropped 8.6% in July from the previous month, particularly because of lower wheat and vegetable oil prices.
Ukraine and Russia’s U.N.-backed export agreement, better-than-expected crop harvests, a global economic slowdown, and the strong U.S. dollar are some reasons behind falling prices.
But analysts have doubts over whether prices will continue to fall, especially since the deal between Ukraine and Russia appears shaky.

Farmers harvest a wheat field near Melitopol in Ukraine. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.
Olga Maltseva | Afp | Getty Images

Food prices dropped significantly in July from the previous month, particularly the costs of wheat and vegetable oil, according to the latest figures from the United Nations’ Food and Agriculture Organization.
But the FAO said that while the drop in food prices “from very high levels” is “welcome,” there are doubts over whether the good news will last.

“Many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,” FAO chief economist Maximo Torero said in a press release.
The FAO food price index, which tracks the monthly change in the global prices of a basket of food commodities, fell 8.6% in July from the month before. In June, the index fell just 2.3% month on month.
However, the index in July was still 13.1% higher than July 2021.

Prices in the short term may fall further, if futures are anything to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.
For example, the wheat contracts closed at $775.75 per bushel on Friday, down from a 12-year high of $1,294 in March, and around the $758 price set in January.

Why prices fell

Analysts cited a mix of both demand and supply reasons for the slide in food prices: Ukraine and Russia’s closely watched agreement to resume exports of grain through the Black Sea after months of blockade; better-than-expected crop harvests; a global economic slowdown; and the strong U.S. dollar.
Rob Vos, the director of markets, trade and institutions at the International Food Policy Research Institute, pointed to the news that the United States and Australia are set to deliver bumper wheat harvests this year, which will improve supply since shipment from Ukraine and Russia have been curtailed.
The higher U.S. dollar also lowers the price of staples, since commodities are priced in U.S. dollars, Vos said. Traders tend to ask for lower nominal dollar prices of commodities when the greenback is expensive.
The widely heralded U.N.-backed deal between Ukraine and Russia also helped to cool the market. Ukraine was the world’s sixth-biggest wheat exporter in 2021, accounting for 10% of global wheat market share, according to the United Nations.
The first shipment of Ukrainian grain — 26,000 tons of maize — since the invasion left the country’s southwestern port of Odesa last Monday.

Skepticism over Ukraine-Russia deal

Global skepticism over whether Russia will keep its end of the bargain hangs in the air.
Russia fired a missile onto Odesa just hours after the U.N.-brokered deal in late-July.
And freight and insurance companies may still think it’s too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any new shock can cause more price surges.
“To make a difference it will not be enough to get a few shipments out, but at least 30 or 40 per month to get the existing grains stored in Ukraine out, as well as the produce of the upcoming harvest,” said Vos.
“To help stabilize markets, the deal will need to hold in full also during the second half of the year since that is the period where Ukraine does most of its exports.”

Even with the existing agreement, arable Ukrainian land may continue to be destroyed “for as long as the war continues,” which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC’s “Street Signs Europe” last week.
“Once this [grain] corridor is over, we might see even more price increases going forward,” Mera said. Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves.
Then there is the pressure of exporting enough grain as quickly as possible from a war zone.
“It’s time that we’re working again. I don’t see us exporting two [to] five million tons per month out of these Black Sea ports,” John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.
“Hungry people, at the end of the day, get hungry very quickly after a week.”
In a note published earlier this month, credit rating agency Fitch Ratings’ analysts wrote that a possible increase in fertilizer prices, which fell recently — but which are still double that of 2020 — could cause grain prices to jump again.
Russia’s restriction of gas supply has led European natural gas prices to spike. Natural gas is a key ingredient in nitrogen-based fertilizers. La Nina weather patterns could disrupt grain harvests later this year as well, they added.

And the fall in food prices is not all good news. Part of the reason why staples have become cheaper is that traders and investors are pricing in recessionary fears, the analysts said.
The global manufacturing purchasing managers’ index has been in decline, while the U.S. Federal Reserve seems bent on raising interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Food staples

Cereal prices, under which wheat falls, fell by 11.5% month on month, the FAO index showed. Prices of wheat specifically fell by 14.5%, partly because of the reaction to the Russia-Ukraine grain deal, and better harvests in the Northern Hemisphere, the FAO said.
Vegetable oil prices fell by 19.2% month on month — a 10-month low — in part because of ample palm oil exports from Indonesia, lower crude oil prices, and lack of demand for sunflower oil.
Sugar prices dipped by 3.8% to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback, and increased supply from Brazil and India.
Dairy and meat prices dropped by 2.5% and 0.5% respectively.

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A New York Fed survey showed that respondents in July expected inflation to run at a 6.2% pace over the next year and a 3.2% rate for the next three years.
That marks a big drop-off from the respective 6.8% and 3.6% results from the June survey.
Expectations for food increases fell at the fastest rate in survey history and the second-fastest for gasoline prices.

Shoppers inside a grocery store in San Francisco, California, U.S., on Monday, May 2, 2022. 
David Paul Morris | Bloomberg | Getty Images

The consumer outlook for inflation decreased significantly in July amid a sharp drop in gas prices and a growing belief that the rapid surges in food and housing also would ebb in the future.
The New York Federal Reserve’s monthly Survey of Consumer Expectations showed that respondents expect inflation to run at a 6.2% pace over the next year and a 3.2% rate for the next three years.

While those numbers are still very high by historical standards, they mark a big drop-off from the respective 6.8% and 3.6% results from the June survey.
Through June, food prices rose 10.4% over the past year, according to the Bureau of Labor Statistics. They are still expected to climb 6.7% over the next 12 months, but that’s a decline from the June survey of 2.5 percentage points, the biggest fall in a data series going back to June 2013.

Likewise, respondents see gas prices, which rose 60% over the past year, increasing at just a 1.5% pace over the next year, a slide of 4.2 percentage points from June, the second-biggest monthly decline in the survey’s history.
The price of regular gas has come down about 67 cents a gallon over the past month though it remains 87 cents higher than a year ago, according to AAA. Commodity prices overall have been falling significantly as well.
Finally, home prices are expected to rise 3.5% from June’s 4.4%, the lowest projected gain since November 2020.

Five-year inflation expectations also slipped, dropping 0.5 percentage point to 2.3%.
The results come as the Fed has been raising interest rates aggressively to bring down inflation running at its highest level in more than 40 years. The central bank in 2022 has hiked benchmark rates four times for a total of 2.25 percentage points, and market pricing indicates a third consecutive 0.75 percentage point increase in September, according to CME Group data.
However, the New York Fed results from July might give policymakers reason to pull back if not in September then later in the year if the inflation data cooperates. The Fed targets inflation at 2% over the long run, so the projected levels in the survey remain well above the central bank’s comfort level.
Over the weekend, Fed Governor Michelle Bowman said she doesn’t expect inflation to come down anytime soon and sees a need to keep pushing rates higher. San Francisco Fed President Mary Daly echoed those sentiments, saying the increases are “far from done.”
Those comments came after the BLS on Friday reported much higher numbers for payroll growth — 528,000 — and wages, with average hourly earnings jumping 5.2%.
The New York Fed survey also showed that overall household spending growth for the next year is expected to cool to 6.9%. That’s also a comparatively high number over the longer run but well below the record-high 9% result from May. The 1.5 percentage point monthly decline is the largest in the survey’s history.
Consumers also grew slightly more optimistic on stock prices during a month that saw the S&P 500 soar 9%, with 34.3% now expecting higher prices over the next 12 months.

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Brits are using cash as a way to manage their budgets as inflation in the country is expected to peak at over 13% in October.
Britain’s Post Office, which offers banking services as well as mail, handled a record £801 million ($967 million) in personal cash withdrawals in July.
The company also attributed the jump to more Brits choosing to holiday in the U.K.

Post Office has attributed the record amount for personal cash withdrawals at its 11,500 branches to more staycations in the U.K. and people using cash to manage their budgets.
Gannet77 | Getty Images

Britain’s Post Office, which offers banking services as well as mail, handled a record £801 million ($967 million) in personal cash withdrawals in July.
In total, more than £3.3 billion in cash was withdrawn and deposited over the Post Office’s counters — the first time the amount has crossed the £3.3 billion threshold in its 360-year history.

Personal cash withdrawals were up almost 8% month on month at £744 in June, and up over 20% from a year ago to £665 million in July.

Staycations and budgeting

The spike in cash use is down to several factors.
“Firstly, more people use cash when they go on staycation, secondly, the Post Office helped to hand out support to energy customers in the form of cash, and thirdly, people are using it as a budgeting method,” said Laura Suter, head of finance at AJ Bell.
The Post Office research found that 71% of Brits planning to go on holiday in the U.K. this year intend to take out cash before doing so. Of those who have holidayed in the U.K. in the last five years, almost a third admitted to being caught out by not having cash on them.
In July, the Post Office processed more than 600,000 cash payouts for people eligible for energy bill support from the British government. That came to around £90 million and allowed people to pay energy bills, top up gas and electricity meters or use cash for easier budgeting.

In total, £3.31 billion in cash deposits and withdrawals were processed at the Post Office in July, £100 million higher than in June.
The data comes as the country continues to grapple with rising inflation. The Bank of England expects headline inflation to peak at 13.3% in October and to remain at elevated levels throughout much of 2023.

Is it here to stay?

The latest figures show Britain is “anything but a cashless society,” said Martin Kearsley, banking director at the Post Office.
“We’re seeing more and more people increasingly reliant on cash as the tried and tested way to manage a budget. Whether that’s for a staycation in the UK or if it’s to help prepared for financial pressures expected in the autumn, cash access in every community is critical.”
But the increase in cash withdrawals isn’t a long-term trend, according to Suter.
“Cash use will likely fall after the summer, when people are no longer holidaying. But it is likely to continue to be used more by people who are budgeting and want to rely on having physical pots of money to control their spending,” she said.
“We’re unlikely to see cash use rise to pre-pandemic levels now [that] so many habits have moved permanently online or to digital payment methods.”

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