Inflation indicators for August showed a softening, at least on the producer basis, as expected, which is only on a headline basis and we see that the input prices of core items continue to increase. Of course, it is not positive in terms of the core inflation outlook, which we refer to more in yesterday's data. Producer prices continued to slow down on an annual basis in August. The slackening in the early stages of production combined with low energy prices has eased the pressure.
The distinction between volatile and sticky items, which is also encountered in PPI, constitutes the main problem. Inflation is broadly increasing and there are few items that show a decline. The decrease in inflation will come from the slowdown in energy prices in the first place, and then from this year's high rates falling from the calculations. The demand-slowing effect of the Fed's tightening will set the stage for the policy-induced inflation decline. In other words, we will explain the normalization of volatile items with circular, and the normalization of sticky items with policy actions. The high prices of core goods and services are the main worrying factor, because inflation in these types of items may decline very slow and delayed unless expectations improve. It is in the hands of the Fed to regulate these expectations, and we have to analyze the effect of tightening on controlling from here.
Recent Fed research seems to confirm policymakers' fears about an early manifestation of a wage-price spiral: An article from the San Francisco Fed shows that short-term inflation expectations are fully reflected in wages during the pandemic. New York Fed research shows that wages and input costs have doubled since Covid began. Import prices should also slow down due to the strong dollar and declining domestic demand for goods, although manufacturers are still struggling with wage pressures. According to the same New York Fed study, a 10% increase in import prices and wages last year was reflected in a 7.4% increase in producer prices compared to a mere 3% increase in previous years.
If we look at the Fed's point of view; PPI will not change plans. The worse-than-expected CPI and the Fed's more robust stance, which wants to see evidence of inflation decline, make it possible to add some undelivered details into the FOMC. The "integrity" of the data Powell will track shows little signs of cooling in the economy, and perhaps even some acceleration. The odds of 50-75 are now more pronounced as 75-100. From this point, we'll be expecting the Fed's next week's move to take up at least 75 basis points. How the Fed will continue, whether it will raise the terminal interest rate and the underlying economic projection updates will be more important. Increasing the terminal rate above 4% would be an important new addition to the known details of the FOMC meeting. With the current data, the thought that the Fed will probably not approach the end of the rate hike has become a bit more dominant.
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