The week ahead for September 19, 2022: Inflation is far from dead
The latest news
Inflation has been the major economic story of 2022, and it jumped back into the headlines last week with the release of August’s Consumer Price Index (CPI) figures. Though overall price growth did slow to a year-over-year rate of 8.3% from 8.5% in July, the magnitude was smaller than expected. Of particular concern was the reacceleration of core inflation (excluding food and energy) from 5.9% to 6.3%. The major stock indices dipped by about 3% on the disappointing news, and they are currently trading well into negative territory compared to a month ago.
For consumers, the picture remains cloudy. Data on housing starts and sales in the coming week is expected to show that the housing market continues to slow. This will reduce households’ ability to weather economic storms. But a strong jobs market has helped, and it continued apace last week with initial unemployment claims dropping yet again, this time to 213,000.
On balance, sentiment has improved through the summer despite inflation worries. The Michigan Consumer Sentiment Index rose slightly to 59.5, continuing its recovery from a record low in June. Energy costs have also moderated considerably (including a drop in gasoline prices by 6.5% in the past month and over 25% since their record high in mid-June), putting discretionary dollars back in consumers’ wallets. They spent 4% less on gasoline in August, replacing some of that with unexpectedly strong spending at car dealerships, restaurants, and home improvement stores. Overall, retail sales nudged up by a surprising 0.3% for the month. But inflation ate away much of the value of this increase, and the core CPI reading shows that there are structural issues beyond energy costs at play in price growth, including lingering supply constraints and rising wages.
The “soft landing” scenario of lowering inflation without recession now appears increasingly unlikely. With its aggressive anti-inflationary stance, the Fed has tacitly signaled that a mild recession (perhaps in early 2023) may be necessary to bring prices under control. It seems almost inevitable that this would impact employment, which in turn will slow demand for commercial space in general and office in particular. Combined with higher borrowing costs, this will put pressure on asset prices, especially in markets where vacancy is already well above pre-pandemic levels
Happening this week
TUESDAY, SEPTEMBER 20
Measure: Housing Starts, annualized rate for August
Previous: 1.446M
Expectation: 1.42-1.44M
Measure: Building Permits, annualized rate for August
Previous: 1.685M
Expectation: 1.61-1.63M
A fast-cooling housing market is expected to accelerate the recent slowing trend in housing starts and new building permits, which nevertheless remain well above pre-pandemic levels after peaking early in the year.
WEDNESDAY, SEPTEMBER 21
Measure: Existing Home Sales, annualized rate for August
Previous: 4.81M
Expectation: 4.7M
The pace of existing home sales has plummeted in 2022. August’s rate could flirt with a 10-year low (excepting the immediate shock of the pandemic in the spring of 2020).
Measure: Federal Funds Rate Target
Previous: 2.5%
Expectation: 3.25% (increase of 75 bps)
Following last week’s disappointing CPI figures, the Fed is all but locked into a 75-bp increase in its key policy interest rate. Anything else would be a major surprise.
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