Fundamental Updates – Slowdown In U.S. Inflation Not A Game Changer (12 August 2021)

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 AUG 12, 2021

Prices stagnate in July.

The U.S. Bureau of Labor Statistics (BLS) reported a continued rise in the prices of goods and services in July albeit at a slower pace while annual inflation has stagnated as expected. The key driver behind the slowdown in inflation comes from the strong deceleration in price rise of used cars and trucks (+0.2%). At the same time, prices of new vehicles (+1.7%) continued to rise at around the same pace as the previous two months.

More downward pressure on oil prices as White House calls for more hikes in production.

The White House called on the OPEC+ to hike oil production yesterday. In the released statement, the White House wrote that “higher gasoline costs, if left unchecked, risk harming the ongoing global recovery”, responding to the recent rise in oil prices that drove the spike in global inflation.

The effect of transitory inflation is starting to play out.

With the opening of the economy and the issue of supply shortage starting to tone down as supply catches up, inflation pressures coming from used vehicles will likely be toned down. Also, with the rising pressure applied on the OPEC+ to increase oil production, we may be hearing from the organization next month during their meeting on further production hike in the future.

Fed likely to remain confident despite slowdown in inflation.

To conclude, although the July inflation figures disappointed the market a little, translating to a weakening in the U.S. dollar, this is unlikely going to be a game changer for the Fed as annual inflation is still way above the central bank’s 2% target. As a matter of fact, the slowdown in inflation is within expectation of the central bank. Hence, the recent releases of strong jobs and inflation figures are likely going to boost the confidence of the Fed in making QE tapering announcements during the Jackson Hole Symposium.