"Super core inflation" may be more stubborn? Strategist: The Fed's anti-inflation war is not over

Investors are eager to declare victory in the Fed's war on inflation. But strategist Alyce Anders says if you take a more objective view of the data,Then the June CPI data does not suggest that inflation is accelerating towards the Federal Reserve's target level.

Anders acknowledged that there was much to watch in last week's report, with headline CPI rising just 0.2% month-on-month and falling at an annualized rate of 1% to 3.0%, the lowest since March 2021. Core inflation rose 0.2% to 4.8% year-on-year, down from 5.3% in May and a peak of 6.6% in September 2022.

However, according to Anders,It's not happening that fast. The base effect is very large, which means that future comparisons will be more difficult.The composition of the decline shows that the more volatile categories accounted for the majority of the decline, meaning that future inflation relief may not be linear.

Further improvement in the "super core inflation rate", which is heavily influenced by services, will be more difficult because of the relationship between services and labour markets and wages.

The problem is that while job growth may become more limited from now on, it is not because of insufficient consumer demand, which could fuel inflation. Demand for labour continues to outstrip supply, and companies are still hiring and raising wages as they find it still relatively easy to pass price increases on to customers.

Since February, Anders has not changed his view that companies expect business conditions to improve in the second half of the year, in part due to inventory restocking and continued strength in the services sector, supported by healthy consumption and labor markets.This means that the job market is still moving at full speed, and inflation cannot be eased quickly, which is bad news for bond bulls.

Consumer confidence rose to its highest level since September 2021 amid slowing inflation and a relatively stable labour market, according to a preliminary survey for July by the University of Michigan released on Friday. Consumers believe their financial situation is improving, with the proportion of consumers who believe high prices are eroding their standard of living falling to the lowest level in a year and a half.

This could signal that high inflation is becoming entrenchedAt the household level, this could affect savings, investment decisions, and wage and price-setting behavior, making it harder for the Federal Reserve to reduce inflation

Meanwhile, according to Bank of America (BofA),Financial conditions are easing, which is driving consumer spending.Bank of America reported a 2.2 per cent year-on-year increase in household spending in the week to July 8, which includes the US holiday on July 4, after stagnating in June.Although it is too early to say whether recent growth points to stronger spending this year, there are indications that it may be the case.

With consumers and the job market performing strongly, investors should know not to rely too heavily on these potentially one-off inflation measures, as much of this month's weakness comes from sharp price declines in categories that are unlikely to reappear. Looking at the core inflation measure most closely tied to labor costs, there is still considerable pressure that could keep inflation above the Fed's 2% target.

Therefore, Anders believes that,The fierce battle between the Federal Reserve and inflation will continue.