Some — like the US Federal Reserve and the European Central Bank — have started to signal that they will soon end their cycle of rate rises, and investors have been only too eager to call the end of the campaign, driving stocks higher as a consequence.
“It would be foolish for any central bank to declare victory,” Randall Kroszner, a former governor of the US Federal Reserve System and now an economics professor at the University of Chicago Booth School of Business, told CNN.
“We’ve seen inflation come down, but we really need to see that this is something that’s going to be sustainably down.”
Overall inflation has slowed sharply in recent months. In the United States, consumer prices climbed 3% in June — a gentle rise compared with a four-decade high of 9.1% hit a year before. Data due Thursday is expected to show that US inflation ticked up to 3.3% in July. Among the 20 countries sharing the euro currency, consumer prices increased by 5.3% in July, exactly half of the record-high inflation reached in October last year.
Inflation has been higher and stickier in the United Kingdom, coming in at 7.9% last month, down from the 11% it clocked in October, a 41-year high.
While central banks should remain “vigilant,” according to Kroszner, he doesn’t see “inflation moving back to [the] peaks that we saw over the last year,” because some of its driving forces -— including supply bottlenecks and big spending by governments during the pandemic -— are no longer at play.
So why are some prices rising again?
Oil supply cuts
Richard Bronze, co-founder of data provider Energy Aspects, told CNN that he expected crude oil prices to keep “grinding their way higher” on the back of production cuts by major exporters, better-than-expected global demand and relatively low global inventory levels.
“Demand, although not great, is doing better than many of us anticipated at the start of the year,” Bronze said. “We haven’t fallen into a serious recession, and consumer demand for things like flights and travel, and the things that really drive up oil demand are holding up well.”
But he added that oil prices “are not heading up at the same pace or to the same extremes” as last year.
The International Energy Agency has forecast that global oil demand will rise to a record 102 million barrels this year. But global oil production is expected to rise to 101.5 million, the agency said in a report last month.
Contributing to that supply shortfall are sweeping production cuts announced by OPEC+, an alliance of the world’s major oil producers, earlier this year in an attempt to buttress oil prices. Further cuts by the alliance’s leading players — Saudi Arabia and Russia — have added to the upward pressure on prices.
Grain deal collapse
A jump in the price of sunflower oil after the Black Sea deal unraveled helped boost the prices of vegetable oils more broadly, with that component of the index showing the biggest increase. Ukraine is the world’s biggest exporter of sunflower oil, according to the UN.
Inflation in consumer food prices remains high. In the euro area, which releases preliminary data early, it stood at 10.8% in July.
Analysts at Capital Economics wrote in a note Friday that the outlook for the global supply of key foodstuffs had “deteriorated” since the start of the year, and they expect higher prices as a result. Wheat supply, in particular, is likely to fall into a “deep deficit,” they said, following the collapse of the Black Sea deal and unusually hot and dry weather in other producing regions this year.
Still, “it appears unlikely that we are going to revisit the peaks in prices reached in the wake of the Russian invasion of Ukraine,” they wrote.
Wages still growing
While overall inflation has fallen in recent months, one component — pay growth — has shown striking resilience in the US and the UK.
“Labor costs are by far the most important input for services, and are still very important inputs for manufacturing, so if wage rates are still growing very rapidly, even if commodity prices are coming down, inflation could persist,” Kroszner said.
“Many firms will continue to meet wage demands because it’s so difficult to get employees,” he said.
On Monday, Fed Governor Michelle Bowman cited the state of the US labor market as one of the reasons why the central bank might need to persist with rate hikes to get inflation back to healthy levels.
The job market “continues to be tight, with job openings still far exceeding the number of available workers,” she said.
#Oil #food #prices #rising #wages #Inflation #isnt #beaten