In all of the primary inflation measures monitored in our Inflation Watch publication, the six month rates of change moved lower in July. For the most part, the twelve month readings have continued to rise. This action is likely pointing to diminishing inflation pressures for the months ahead.
Still believe interest rates could be headed higher in 2007. While the economy does seem to be slowing and a recession is a possibility by early 2008, we expect the twelve month rate of inflation to accelerate in the second half of 2007.
Inflation is weak in July but the rebound in oil prices, the renewed weakness in the dollar and the strength in Chinese Yuan are all positive for inflation expectations in the near term. The disinflationary headwinds from outside of the U.S. are only getting stronger, not weaker. It’s hard to disagree with the market’s low rate hike expectations.
Inflation measures are broadly in line with expectations, and overall inflation pressure is anemic. We maintain our view that inflation will be a non-factor in the first half of 2014, and it might increase moderately in the second half. Inflation on the producers’ level is weak, too and the PPI inflation pipeline doesn’t seem to pose any immediate inflationary threat either.