Insights into the Inflation Print
The U.S. inflation data for July 2022 are causing positive reactions on the capital markets with a drop in the annual rate from 9.1% to 8.5%. Following the interest rate hikes already implemented and falling commodity prices - above all in the all-important energy sector - more and more market participants are assuming that the Federal Reserve's rate hike cycle is likely to be less aggressive and that a recession will not have to be conjured up in order to bring the high inflation rates under control. In short, the so-called Goldilocks scenario is increasingly becoming the consensus, i.e. economic growth would be neither too high nor too low and inflation will come back to normal levels, so that there should be no threat of disruptive fires from the central bank.
Campbell Harvey, Partner and Head of Research at Research Affiliates, explains in this video analysis that these expectations could turn out to be too optimistic and, given the inflation dynamics, deceptive. The renowned economist, who developed the use of the yield curve as a leading indicator of recession as early as 1986, first shows what impact the calculation mechanics themselves will have on future inflation rates. He then turns to the structural composition of the Consumer Price Index (CPI), specifically addressing the role of rent growth, which accounts for 32 percent of the basket. The bad news is that the massive increase in Owners Equivalent Rent will not fully feed through to overall inflation rates until some time in the future due to the change in calculation methodology.