We Need Consumer Prices To Come Down – And Stay Down – For The Fed To Pivot

We Need Consumer Prices To Come Down – And Stay Down – For The Fed To Pivot
Stéphane Renevier, CFA

over 1 year ago1 min

If the Federal Reserve (the Fed) is ever going to think about tapping the brakes on its aggressive interest rate hikes, it’ll need to see some pretty hefty drops in consumer prices first.

That much is clear from the projections above. If consumer prices continue to rise in roughly the range we’ve seen in the past year (generally increases between 0.5% and 1% from the month before), inflation is expected to be between 8.8% – just inches from its current 9.1% – and an eye-watering 11.7%. And even in the more likely scenario where prices rise as little as 0.3%, inflation will still come in at 5.9%. For inflation to fall significantly, prices would have to stop rising altogether.

July’s consumer price data is out on Wednesday, and investors are expecting prices to be just 0.2% higher in July than the month before – the smallest uptick since February 2021. But with rent and wages rising, and high prices in the services industry not going anywhere, those investors are likely to be off the mark. And even if they’re right, we’d need another few months at that level for the inflation rate to drop below 5%. That’s the point at which the Fed might conceivably consider hitting pause on rate hikes, but it’s not likely to happen without a more significant downturn in the economy…

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