Inflation Should Moderate in August, Boosting the Crypto Outlook

Among the clear recollections I have from the COVID-19 pandemic, one stands out: the joy of savoring lunch again. A special moment that sticks in my mind is when I discovered that my preferred deli, The Wine Merchant, had continued operations amidst everything.

For the first three to four weeks of the pandemic, my family and I mostly confined ourselves to our neighborhood, venturing out only to get groceries or essential supplies like cleaning items. However, after conversations with friends who were still working in offices and grabbing takeout lunches, I felt a pang of envy. The next day, I decided to step out for a sandwich.

One thing you need to understand is that I’m a creature of habit. So, I can go for years getting the same thing for lunch every day. And my go to sandwich is turkey with Swiss cheese and Dijon mustard on rye, add a half order of salami. In addition, I grab a bag of UTZ barbeque chips and two bottled cokes. If prices change, I notice.

At the beginning, when I initially arrived, I was still paying the same $12 as before COVID. However, over time, I began to see prices gradually increasing. By the end of the first year, my lunch cost $15, and by the second year, it had reached $18. After two more years, the price had escalated to $20. But recently, I’ve found something unusual… The price has remained constant.

For a clearer understanding, let’s examine the cost of white bread within the same period instead.

Here’s how we could rephrase that sentence: The cost of white bread was $1.36 at the end of 2019. From the start to the end of 2020, the prices remained constant before suddenly rising by 13% to $1.54. In 2021, the price held steady once more but then experienced a significant jump of 21% in 2022. The growth rate decreased slightly in 2022, with an additional 8% increase. However, the price has stabilized and even dropped somewhat this year.

As I’ve observed, this situation seems strikingly similar to the trend we see with national inflation. With rising prices for goods, demand appears to be diminishing, as people might be dining out less often than usual. This shift suggests that the pressure on prices could decrease significantly when the August personal consumption expenditures are released at the end of September. This reduction in price pressure could pave the way for more interest rate cuts from the Federal Reserve this year, bolstering a sustained uptrend in speculative assets such as cryptocurrency.

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

To have a sense of how Personal Consumption Expenditures (PCE) growth unfolds, it’s essential to analyze the broader context. Thus, instead of focusing on single months, we should examine the data on an annualized basis. This approach helps prevent short-term spikes from skewing the significant long-term perspective.

In simpler terms, about 35% of the Personal Consumption Expenditures (PCE) index comes from goods, while the remaining 65% is attributed to services. This implies that services have a greater impact on the direction of the index. However, it’s essential to focus more on the core PCE figure, which excludes food and energy costs.

Let’s dive a little deeper. You’ve got food and energy, which are examples of non-durable goods – they don’t last more than three years. These items account for roughly two-thirds of the consumer expenditure on goods category, while the remaining third is composed of durable goods, which are designed to last longer than that three-year mark.

The central bank prefers to exclude food and energy costs from its calculations because their prices tend to fluctuate greatly. This helps policymakers create a more consistent picture by reducing volatility. As a result, when we calculate inflation without these items, the primary PCE index mainly reflects service prices.

As a researcher delving into this topic, allow me to shed light on the Services component that plays a crucial role in the discrepancy between the BEA (Bureau of Economic Analysis) and BLS (Bureau of Labor Statistics) inflation measures. Consequently, Personal Consumption Expenditures (PCE) growth often appears more moderate compared to the Consumer Price Index (CPI).

In the Personal Consumption Expenditures (PCE), here’s a breakdown of some common expenditure categories:

Based on BLS data, in August, the cost of shelter increased by 0.5%, healthcare services experienced a slight decrease of 0.1%, financial services dropped by 0.3%, insurance costs decreased by 0.2%, hotel room prices went up by 1.8%, recreation services remained constant, and transportation and warehousing services saw a minor decline of 0.1%.

When we factor in the weights, it results in approximately a 0.2% rise for August, which aligns with the projected 0.2% expansion suggested by the Federal Reserve Bank of Cleveland and general expectations.

So now, let’s look at what year-over-year growth will look like at 0.2%…

Based on my predictions, a 0.2% growth rate each month equates to about a 2.7% rise in core PCE annually. This aligns with Wall Street’s predicted 2.7% increase, but it falls slightly short of the Cleveland Fed’s forecast of 2.8%.

Most significantly, the recent six-month growth pace has been approximately 0.2%. This equates to a projected 2.4% annual core growth, which is lower than the current rate. This suggests that the growth rate may decelerate further in the coming months.

If my predictions about PCE are accurate, it could lead to a more favorable perspective for looser monetary policies by the Federal Reserve. Given the current pace of inflation and effective fed funds rate, real interest rates would have a 2.7% margin to decrease before they start negatively impacting inflation growth.

Essentially, this alteration means that the adjustment will provide our national bank ample space to initiate lowering interest rates without triggering an inflation resurgence. This action is expected to bolster the prediction for economic expansion to decelerate, but not implode, thereby fostering a sustained increase in speculative assets such as bitcoin and ether.

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