UNITED STATES — RBC Capital Markets reports that U.S. inflation showed more tentative signs of stabilization in July. In fact, the headline year-over-year rate ticked up to 1.7 percent after declining for four straight months to 1.6 percent in June. And, excluding food and energy products, the year-over-year rate held steady at 1.7 percent for a third straight month.
The concern around inflation year-to-date has, arguably, been more the deceleration in core price growth than the rate itself which is still just modestly below the Federal Reserve’s 2 percent inflation objective. In that respect, stabilization in recent months should provide further reassurance to the Feds that underlying price growth is not entering a fundamentally slowing trend.
Indeed, as the Fed has noted, the core rate would be higher if not for a number of transitory factors, including a sharp decline in telecommunications prices last March that will continue to bias the year-over-year growth rate lower until it falls out of the annual calculation next year in March 2018.
On the other hand, there is also little sign that upward inflation pressures are building. That is allowing the Fed to remain very cautious in withdrawing monetary policy stimulus despite an economy that looks strong enough to withstand further rate hikes. RBC stated it looks for the Feds to announce plans to begin shrinking their balance sheet in September, holding off on a rate hike at that time to gauge the market impact of tapering.That brief pause should give policymakers some time reassess the trend in inflation ahead of what we expect will be another rate increase in December.
Source: RBC Capital Markets