Here's Why the Dip in U.S. Inflation Isn't All Good News

---

Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Markets were cheering after the latest reading on U.S. inflation came in better than expected, though the reading offers little to celebrate in relative terms.

The U.S. Bureau of Labor Statistics reported Wednesday that year-over-year inflation came in at 8.5% in July, compared to the 9.1% annual inflation from June. That June reading was the highest in 40 years, but even with the slight dip, it's far from the goal of 2% set by U.S. economic policymakers.

Energy prices remain the largest contributor to the spike seen in consumer goods, and it was those prices that drove most of the July cool-off.

"The gasoline index fell 7.7% in July and offset increases in the food and shelter indexes, resulting in the all-items index being unchanged over the month," the government reported.

In layman's terms, retail gasoline prices were lower in July than they were in June. The federal government put the national average price at the pump at $5.03 per gallon for June and $4.67 for July.

In its latest monthly report, the U.S. Energy Information Administration (EIA), part of the Energy Department, forecast an average retail price of $4.29 per gallon for the third quarter and a dip to $3.78 per gallon by the fourth quarter.

That's quite a bit of relief when considering June highs. The U.S. is a big country and people drive a lot. But gas prices are still high. Not counting this year, you'd have to go back nearly a decade--to 2013--to find prices at the pump this high.

Click on the image at right for a graph detailing U.S. gasoline prices since the mid-1990s, according to the EIA.

But even at $5-something a gallon, consumers seemed unfazed--which may make matters worse, because demand can overwhelm supplies. The recent July 4 holiday weekend was a record-setter in terms of travel.

The EIA added that demand was holding up globally as well, despite higher prices. It put global demand for petroleum and liquid fuels at 98.8 million barrels per day (BBL/d) in July, an increase of nearly 1 million BBL/d from year-ago levels. Next year, global consumption increases by another 2.1 million BBL/d.

And by year's end, the European Union will have moved sharply away from Russian crude oil, suggesting the global market has yet to see the full impact of this year's supply-side squeeze. Energy prices will remain high and, as the largest contributor to the overall spike in consumer goods, so too will inflation.

Outside of the dip in energy prices, you won't find much relief and consumers may be running out of discretionary cash to spend, the lifeblood of a capital economy. Food at the grocery store is 13.1% more expensive than it was a year ago, while clothing is up 5.1% and rents are up 5.7%.

Paychecks and leftover stimulus from the depths of the pandemic are continuing to support U.S. households, but wages are not keeping up with inflation. Consumer sentiment is at rock bottom.

These inflationary pressures started to emerge late last year as a public vaccinated against COVID-19 worked to break cabin fever by spending and travelling. The surge in demand overwhelmed supply chains, while labor shortages emerged in jobs that nobody wants. Simply put, the economy was already on its back foot.

Then Russian military forces invaded Ukraine, upending global markets even further. From grain to minerals and fossil fuels, Russian goods were prevalent across the world economy. The resultant Western push to rob the Kremlin's war chest by way of sanctions on those goods leaves a sizable gap to fill. That gap will remain so long as Russian boots are on Ukrainian soil.

Overall, the lack of change in the all-items index in the U.S. inflation reading was met with cheers, but that was a month-on-month reading and markets tend to have a much longer outlook than that. While the prevailing sentiment is that U.S. inflation has peaked, we still have a long way to go before we get back to normal.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).