Looking At: The War on Inflation

Estimated reading time: 5 minutes

Counting Chickens

June inflation data came in cooler than expected across the board. On both a month-over-month and year-over-year basis, the latest Consumer Price Index (CPI) and Producer Price Index (PPI) readings were below analysts’ expectations. These are good signs for consumers and businesses.

Looking at CPI, which is more important for consumer sentiment, we can see that the lower readings were not just in the energy-related components. There were reductions or even contractions in the price growth of various goods, services, and shelter.

And as the chart below shows, the measure referred to as “supercore Inflation” finally showed some movement in the right direction. Like the core measure of inflation, it removes food and energy prices, but it also excludes shelter and other core goods. What’s left is theoretically slower moving and more reflective of underlying inflation.

While market watchers knew oil prices fell in June, drops in other major components were a welcome surprise. Markets celebrated the news, pushing Treasury yields sharply lower and reducing bets that we’ll see interest rate hikes in 2026.

Fed Not Partying… Yet

Despite the market’s party, comments on inflation from the Federal Reserve have been more cautionary and measured. 

“I’m not going to show up here and say mission accomplished,” Chairman Kevin Warsh said in testimony to Congress Tuesday. “What I’d say is there’s plenty of work to do.” 

And in a speech earlier this week, Fed Governor Christopher Waller warned, “If we get another hot reading, then the FOMC will need to consider tightening monetary policy in the near term.” 

In our observation, Fed officials typically want to see at least three months of data before feeling confident that a shift has occurred. The June inflation readings are promising, but not enough to change their stance. 

In our opinion, they’re doing the right thing by remaining skeptical and flexible.

Oil Down, Not Out

Although it appears full deescalation of the war with Iran did not last, oil prices remain well below their war-time peak after news of a peace deal drove prices down sharply last month. As a result, gasoline prices are also well off their peak — another welcome development. 

Still, it’s too early to suggest that oil markets will stay at these levels. Another metric we track, crack spreads, measures the profit refineries earn by converting raw crude oil into products like gasoline and diesel. This gives us a more nuanced read on the supply/demand dynamics within the oil market. 

As the chart below shows, crack spreads are at record highs. What this means is that refiners are experiencing stronger demand than supply, given the supply constraints presented by the war.

In other words, even though supply/demand dynamics can change quickly, it’s clear that the energy market still has the potential to drive inflation higher again. 

We are optimistic that we have already seen the peak in inflation for this environment, but we also recognize that declaring premature victory can be a major faux pas. The inflation data we saw this week was very encouraging, but it’s not yet time to throw a party. 

We believe including inflation hedges in portfolios such as commodities and real estate are a smart allocation. Right now inflation may be down, but it’s too early to say it’s out. 

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