CPI Growth Expected to Decelerate Further

The growth rate of inflation is rapidly approaching the Federal Reserve's target of 2%. A daily ritual I cherish is starting my day with a cup of coffee. After my espresso machine heats up, I enjoy crafting two lattes, each with an additional shot of espresso. This routine has become an integral part of my daily life, and I often feel that my day cannot commence without it. Prior to the COVID-19 pandemic, my morning routine differed slightly. Although I still looked forward to my daily cups of coffee, I would purchase them instead of making them myself. I would begin my workday, complete my morning tasks, and then visit my favorite barista to buy a hot cup of coffee. However, this changed when I returned to the office after the pandemic. Upon my initial return, I noticed that the price of coffee had increased from $5 per cup to $7.50. While the previous price did not bother me, the sudden increase did. As a result, I reduced my coffee purchases to just one cup per day, and eventually, I limited myself to only a few cups per week. After saving money by making my own coffee, the 50% increase in price was a significant shock, and I no longer felt the need to buy coffee regularly. Recently, due to time constraints, I was forced to purchase a latte. Upon paying for it, I noticed that the price remained the same. I believe many of you, like me, have experienced similar situations, where you have become more cautious about spending your hard-earned money on various goods after witnessing significant price increases following the pandemic. Later this week, the U.S. Bureau of Labor Statistics will release the inflation growth metrics for September. The reported number will indicate that price pressures have reached their lowest level since February 2021, which will support further rate cuts by the central bank and underpin a steady rally in risk assets, including cryptocurrencies. The data suggests that price growth is slowing down. Manufacturers are finding it increasingly difficult to pass on price increases to consumers. If my model is accurate, we can expect inflation growth to return to the 2% target sooner rather than later. Every month, the Dallas, Kansas City, New York, and Philadelphia Feds conduct surveys among manufacturers in their districts to gauge the state of economic activity. The questionnaires inquire about new orders, lead times, employment, production, and costs. The responses provide insight into whether costs are rising, falling, or remaining unchanged. A crucial aspect of these surveys is the 'prices received for goods' indicator, which reflects the prices customers pay manufacturers for their finished products. This metric is similar to the Consumer Price Index (CPI) and serves as an indicator of whether inflation is rising or falling. The states where these four banks are headquartered – Texas, Missouri, New York, and Pennsylvania – account for approximately 25% of the domestic economic output. Therefore, the survey results provide a decent indication of national demand. Moreover, the data is released ahead of the CPI, offering an early glimpse into the inflation trends. The latest readings indicate that prices received by manufacturers have declined. In the combined prices received index (CPRI) chart, I merged the readings from the four central banks into a single gauge, represented by the blue line, and compared it to the CPI, represented by the orange line. The CPRI tends to be a leading indicator, peaking in October 2021, while the CPI reached a 40-year high in June 2022 before starting to decline. As shown in the chart, the CPRI exhibited a steady trend throughout 2019 and the beginning of 2020, with inflation growth remaining below 2%. However, when businesses sent workers home during the pandemic, the CPRI gauge dropped, and as the economy reopened, it surged. In each instance, the CPI followed a similar pattern, albeit with a lag. Now, the CPRI trend appears to be stabilizing, as seen on the right side of the chart. This stabilization is occurring as consumers' excess COVID-19 savings dissipate and spending slows down, leading individuals to become more price-conscious and retain more of their money. In December 2023, the CPRI reading was 8.4, and the latest reading was 8.8. So far this year, the index has remained within a range of 5 to 10. This is significant because the longer the CPRI holds steady, the more likely it is that inflation growth will slow down, as the annualized reading will drop the older, higher numbers, helping to bring the CPI back below the 2% target. Over the past three months, inflation has grown at a pace of 0.1% per month. If this rate continues, we could see annualized growth drop to 1.5% by March 2025. According to the regional central bank's economic team, headline CPI is expected to decline from 2.5% in August to 2.3% in September, marking the lowest reading since March 2021, when the numbers began to rise rapidly. As I mentioned earlier, price growth is moderating, and manufacturers are finding it challenging to pass on price increases to consumers. If my model is correct, we will see inflation growth return to the 2% target sooner rather than later. Therefore, it should come as no surprise when the report later this week confirms what my indicator is suggesting. The easing of price pressures will reinforce the Fed's conviction that inflation growth is slowing down, providing the central bank with the flexibility to lower interest rates further. This change will act as a tailwind for a steady long-term rally in risk assets priced in dollar terms, including bitcoin and ether. Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or its owners and affiliates.