CPI Growth Is Set to Slow Even More

One aspect of my mornings that I truly enjoy is savoring coffee. Once my coffee maker is heated up, I eagerly prepare two lattes, each enriched with an additional shot of espresso. This ritual has become so ingrained in my daily routine that frequently, I feel as if my day lacks momentum without it.

Before COVID-19, things were slightly varied in my routine. I used to eagerly anticipate my daily coffee fix, however, instead of brewing them at home, I relished the walk to buy them. Upon reaching the office, I would complete my morning tasks, and later, make a beeline for my favorite coffee shop to catch up with the barista and savor a fresh cup.

The dynamics shifted significantly upon my return to the office. Previously, I was spending approximately $10 a day or $5 per cup. However, when I picked up my first post-break coffee, I discovered the cost had escalated to $7.50. Although the previous $5/cup didn’t seem bothersome due to its consistency for years, this price hike was certainly noteworthy.

Initially, I reduced my social outings to only one daily cup visit. Not too long after, this decreased to just a few cups weekly. Following these reductions, I managed to accumulate quite a sum by brewing coffee at home. When the price per cup increased by 50%, it felt like a hard blow. Consequently, I began to question its necessity.

Recently, due to a lack of time, I couldn’t brew coffee myself, so I popped into a café to buy a latte instead. Interestingly, the price was just the same as before. I believe that numerous individuals, like me, are dealing with similar predicaments. Following the pandemic, we’ve become more cautious about spending our hard-earned money on goods whose prices have increased significantly.

This week, I’m eagerly anticipating the release of inflation growth figures for September by the U.S. Bureau of Labor Statistics. When this number is disclosed, it will indicate that price pressures have reached their lowest point since February 2021, suggesting a decrease in overall costs. This reduction in prices could potentially lead to further interest rate cuts by our central bank, bolstering a sustained upward trend in riskier assets such as cryptocurrencies.

But don’t take my word for it, let’s look at what the data’s telling us.

Monthly, the Dallas, Kansas City, New York, and Philadelphia Federal Reserve Banks survey manufacturers within their respective regions regarding the current activity status. The surveys inquire about aspects such as new orders, delivery times, employment levels, and production rates. They also gather information on whether costs are increasing, decreasing, or remaining stable.

As a researcher, I’m particularly interested in examining “the amounts paid by consumers for goods.” This figure represents the cost that customers bear when purchasing manufacturers’ completed products. It serves a similar purpose to the Consumer Price Index (CPI). Consequently, the trend of these received prices can signal whether inflation is increasing or decreasing.

Currently, these four states – Texas, Missouri, Kansas (I assume you meant Missouri), New York, and Pennsylvania – where the headquarters of those four banks are located, account for approximately a quarter of the nation’s total economic production. This gives us a fair understanding of overall demand in the country. However, the figures we obtain are ahead of the Consumer Price Index (CPI), which means we are essentially peeking at data that precedes its official release.

And the latest readings indicate prices received fell…

In the provided graph, I’ve merged the data from the four main banks into a unified indicator, known as the Combined Prices Received Index (CPRI), represented by the blue line. This index was then contrasted with CPI (represented by the orange line). Noticeably, the CPRI often serves as a precursor, reaching its peak in October 2021. However, it wasn’t until June 2022 that CPI surpassed a 40-year high and began to decline.

In the graph you see, my index maintained a consistent pattern throughout 2019 and early 2020. Simultaneously, inflation growth stayed below 2%. However, when businesses asked employees to work from home due to the pandemic, the CPRI indicator fell. Interestingly, as the economy resumed activities, it picked up speed. Correspondingly, we observe that CPI behaves similarly, but with a delay in response.

It seems that, based on the chart provided, the CPRI trend is becoming steady. This is likely due to the fact that consumers’ excess savings from the COVID-19 period have decreased, leading to a reduction in spending. As a result, people are becoming more cost-conscious and holding onto their money more tightly.

In December 2023, the gauge displayed a value of 8.4, and this past month, it increased slightly to 8.8. Interestingly, throughout the year thus far, the index has fluctuated between 5 and 10. This is significant because if it maintains this level for an extended period, there’s a higher chance that inflation growth will decelerate. Consequently, as the older readings with higher values are replaced by newer ones, it could help bring the Consumer Price Index (CPI) below its 2% target.

For the past three months, inflation has been increasing by about 0.1% each month. Should this trend persist, the yearly growth might decrease to around 1.5% by March 2025.

Clearly, the economic experts at the local central bank predict that the headline Consumer Price Index (CPI) will decrease from 2.5% in August to 2.3% in September. This would represent the lowest figure since March 2021, a time when the numbers started to significantly increase.

As previously mentioned, the pace of price rise is slowing down. It appears that manufacturers find it challenging to impose higher prices on customers. If my prediction holds true, inflation will return to a 2% rate more quickly rather than later.

So, don’t be surprised when the report later this week confirms what my indicator’s telling us. Easing price pressures should increase the Fed’s conviction that inflation growth is slowing. That will give the central bank room to lower interest rates even more. The change will act as a tailwind for a steady long-term rally in risk assets priced in dollar terms, including bitcoin and ether.

Please be aware that the opinions stated within this article belong solely to the writer, and may not align with the views of CoinDesk, Inc., its proprietors, or its associated entities.