Why a strong dollar and blunders in retail inventories could help lower inflation by next year

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Topline

Despite growing concerns over a looming recession, a growing number of experts believe that upcoming discounts and easing supply chain disruptions could help cool the inflation rate faster than expected, potentially offering a well-deserved respite to cash-strapped Americans and wary investors. the implications of a rapid tightening of monetary policy.

Highlights

Although soaring gasoline prices may push headline inflation higher this year, core inflation, which excludes volatile food and energy prices, has peaked “and will fall faster than forecast the markets and the Federal Reserve,” the economists at Pantheon Macro wrote in a Wednesday note.

As a stronger dollar begins to make imports cheaper and rising inventories begin to ease supply shortages, economists predict that inflation, which unexpectedly hit a 41-year high of 8.6% in May, will drop to 4.9% by the start of next year. inflation jumped from 6% to 3.7%, enough for Fed officials to ease the interest rate hikes that rattled markets.

Retailers facing more hesitant consumers to spend are “sitting on mountains of inventory” and on the cusp of an aggressive wave of discounts next month after piling on goods due to pent-up demand during the pandemic, notes analyst Adam Crisafulli of Vital Knowledge Media.

Among those willing to cut prices on products ranging from clothing and furniture to TVs and appliances include big-box retailers like Walmart, Costco and Target, which last month announced upcoming discounts to help manage inventory costs after a disappointing shortfall.

“The underlying forces of inflation could be moving in a more favorable direction,” Crisafulli says, saying “significant change” is possible in the coming weeks, and also citing “significant declines” in commodity prices raw materials such as wheat, corn, copper and iron. ore.

There’s even some positive news for gasoline prices: wholesale prices have fallen to around $3.75 per gallon from around $4 in recent weeks, which means retail gasoline prices , close to $5 a gallon, is expected to fall “pretty sharply” over the next few weeks. , according to Pantheon, although it’s unclear how long the respite may last.

Contra

Two areas that are unlikely to help inflation subside anytime soon: auto and rent prices (which have driven price spikes throughout the pandemic) are still suffering from historically low inventory levels despite rising rates that are beginning to stifle burning demand.

Key context

Fueled by government stimulus, supply chain constraints and, more recently, the war on Ukraine, prolonged levels of high inflation pushed the Fed into the economic tightening cycle the more aggressive in decades, crashing markets and sparking recession fears. “People are really suffering from high inflation,” Fed Chairman Jerome Powell told Congress on Thursday, noting that it remained “absolutely essential” for the Fed to restore price stability, before acknowledging that it would be “very difficult” to avoid a recession while doing so.

Target

After Target’s earnings last month, market analyst Tom Essaye of Sevens Report pointed out that retail customers are buying fewer high-margin goods (like apparel and electronics) to spend more on lower-margin food. (such as bread and eggs), and are also changing from brand names to less expensive private labels – signs that “consumers are starting to get pressured by inflation”.

Chief Spokesperson

“The three biggest challenges for investors over the next few months will be inflation, inflation and inflation,” says Sebastien Page, chief investment officer at T. Rowe Price. “It’s the transmission mechanism for all the other risks we face.”

crucial quote

“Whether the Fed’s actions lead to a marked slowdown or an outright contraction will become clear in the coming quarters,” said Andrzej Skiba, head of $127 billion fixed income at BlueBay Asset Management, on Wednesday. . “Much will depend on whether inflation reacts quickly enough.

To monitor

Inflation data for June is expected to be released on July 13. On average, economists expect prices to rise at an annual rate of 8.7% this month, according to the Cleveland Fed. This would push annual inflation to its highest level since December 1981.

Further reading

Markdown Mania – TVs, furniture, leisurewear and more – hits major retailers moving excess inventory on pandemic-era products (TUSEN)

Here’s why Biden administration officials think a recession can be avoided (TUSEN)

The stock market could crash another 20% if the US plunges into recession – these industries are most at risk (TUSEN)

‘Worst fears confirmed’ as Fed ‘plays a dangerous game’ with inflation and rate hikes (TUSEN)

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