With gas prices continuing to fall, U.S. inflation is expected to slow for the second straight month in August, and to see its first decline in two years. However, this likely won’t be enough to prevent the Federal Reserve from delivering another big rate boost later this month.
Consumer price is expected to drop to 7.9% on a yearly basis, continuing a downward trend for the second consecutive month, Credit Suisse said in a note on Tuesday.
When food and energy are excluded, Switzerland’s bank forecasts core inflation to increase slightly to 6.0% from 5.9% in July.
A major reason for the slowdown, according to the Zurich-based bank, would be a drop in prices for core products, while inflation for core services, particularly housing, is expected to stay strong. Industry data for flights, hotels, and vehicle rentals also reported decreases, indicating that prices for travel services should continue to fall. However, service inflation excluding housing and travel likely remains elevated given strong wage growth.
The U.S. Consumer Price Index (CPI) slowed down to 8.5% in July, beating economists forecasts of 8.7% after hitting a fresh 40-year high of 9.1% in June. Still, the annualized CPI remains around at its highest level in four decades.
Meanwhile, core CPI which excludes volatile food and energy prices remained at 5.9% on a yearly basis.
Further, Credit Suisse noted that if the inflation results are in line with its projection, it would be somewhat below current consensus expectations, but likely not enough to change Fed hawkishness in light of lately better-than-expected ISM and employment data.
Fed officials have indicated that it is willing to raise interest rates by either 50 basis points (bp) or 75 basis points (bps) unless inflation surprises significantly to the downside.
As the U.S. CPI is likely to slow for the second month in a row, the expectation range is narrow, ranging from 7.9% to 8.3% year over year, with Goldman Sachs and Standard Chartered forecasting 8% inflation and JPMorgan forecasting 8.1%.
In addition, the Fed is expected to pause interest rate hikes sooner than widely expected due to tumbling inflation, according to Credit Suisse’s chief U.S. equity strategist.
“Every one of us sees when we go to the gas station that the price of gasoline is down, and oil is down. We see it even with food. So, it really is showing up in the data already. And, that’s a really big potential positive,” Jonathan Golub told CNBC.