It Ain’t Over ‘Til It’s Over
– Yogi Berra
The combination of continued moderation in inflation and higher than expected second-quarter real GDP growth has buoyed both investor and consumer sentiment with growing expectations that the Federal Reserve may be approaching the end of the credit tightening cycle and the U.S. economy may avoid recession and achieve a so-called “soft landing.”
With respect to inflation, the widely watched “headline” consumer price index (CPI) showed a year-over-year increase of slightly more than 3% in June compared with a near 9% increase in June 2022. While it is too early to declare the period of excess inflation fully contained, the data are clearly moving in the right direction. The Fed may want to see various measures of inflation move to or below the policy target of 2% and remain there for some time before they begin to reverse course. On this point, it is worth noting that the same recent inflation report also shows a more modest improvement in core inflation (excluding food and energy prices) with year-over-year growth of nearly 5%, well above the Fed’s longer-term target.
