In One Chart: ‘Disinflationary wave is building’ even as investors anticipate aggressive Fed rate increase, says this economist

by | Sep 20, 2022 | Stock Market

Signs of disinflation have emerged even as investors fear Federal Reserve Chair Powell and his colleagues will keep battling inflation through aggressive rate hikes that have hurt both stocks and bonds, according to a Capital Economics note.  While it appears the Fed may on Wednesday announce that it’s hiking its benchmark rate by three quarters of a percentage point for a third straight time, Paul Ashworth, chief North America economist at Capital Economics, expects a less aggressive monetary policy stance could soon follow.

“If we’re right that inflation will fall back soon, officials will quickly pivot to much smaller hikes,” he said in a note Tuesday. “The continued drop in gasoline prices and easing food inflation will weigh on headline CPI over the next month or two,” he said, referring to the consumer-price index. He also pointed to signs of disinflation in core CPI data, which exclude energy and food. “Despite the larger than expected 0.6% rise in core prices in August, there are mounting signs of disinflation there too,” he wrote. Supply shortages have normalized, with the firm’s product shortages indicator now suggesting that “core goods inflation could fall back to 2% before the end of the year, from 7% in August,” according to Ashworth.

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