A Potential Surprise Next Week: Negative Inflation

IT’S TOO EARLY TO DECLARE VICTORY over inflation, but there could be a surprise coming in next Tuesday’s Consumer Price Index report — a slightly negative headline number, with prices perhaps falling by 0.1% or 0.2% in August.

THIS GREAT NEWS comes from our old friend Stuart Hoffman, the highly respected senior economic adviser at PNC. Stuart believes falling energy prices could produce a negative overall CPI report for August — and, possibly, for September as well.

HOFFMAN CAUTIONS THAT THERE ARE TWO IMPORTANT caveats: the “core” CPI number could remain a problem, and the Fed appears determined to raise rates by at least 100 basis points between now and the end of the year.

BUT A 75 BASIS POINT HIKE at the Fed’s Sept. 20-21 FOMC meeting is not certain, despite a Wall Street Journal article this morning that says the Fed is still leaning toward another steep hike. A negative CPI report for August — which won’t even factor in this week’s oil price plunge — could temper the Fed’s zeal.

HOFFMAN CONCEDES THAT THERE ARE STILL INFLATION PROBLEMS: higher rents, surging food costs, and new car prices are just some of the sectors that are still running hot. But gasoline prices are about 5% of the overall CPI, and there’s a major shift of thinking on energy (this morning’s New York Times has an important article on optimism that Western Europe can withstand Russian cutbacks this winter).

THE SPOTLIGHT WILL SHINE on Fed Chairman Jerome Powell, who has been adamant that the Fed will drive rates higher, even if that risks a recession. But what if inflation comes in negative for August and September?

HOFFMAN ISN’T WORRIED about Powell caving in to political pressure, but we’d offer this comment: continued aggressive Fed rate hikes despite a sharp drop of inflation — even if it’s temporary — will make Powell a political target. For now, the criticism is mostly from Democrats on the left like Elizabeth Warren and Bernie Sanders.

BUT A 75 BASIS POINT HIKE later this month may prompt howling from a wider range of Democrats, as the November elections approach. Powell stood up to Donald Trump, and he probably won’t relent now, but a negative CPI print next week — followed by another steep rate hike — undoubtedly would make the White House squirm.

THIS MUCH SEEMS LIKELY: Inflation probably has peaked, Hoffman says, and the remarkable oil price plunge is a de facto tax cut for consumers. The economy continues to muddle through this rough patch, and a minus sign in next Tuesday’s inflation report could mark a psychological turning point.

Related: Earnings Decline: Likely More To Go Before We Are Done

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