August Inflation Rate Expected to Decrease, Supporting Crypto Market

The rate of inflation is slowing down. One of my most memorable experiences during the COVID-19 pandemic was when I rediscovered my favorite deli, which was still open for business. For the first few weeks of the pandemic, my family and I barely left our neighborhood, except to go to the grocery store or buy essential supplies. However, after talking to friends who were still going to the office and getting take-out, I decided to venture out and get a sandwich. As someone who follows a routine, I tend to order the same lunch every day - a turkey sandwich with Swiss cheese and Dijon mustard on rye, accompanied by a half order of salami, a bag of UTZ barbecue chips, and two bottled Cokes. If the prices change, I notice. When I first started going back to the deli, I paid the same $12 I had before the pandemic. However, as time passed, I noticed that the prices began to increase. By the end of the first year, my lunch cost $15, and by the end of the second year, it had risen to $18. By the end of the third year, the price had increased to $20. Recently, though, I've observed that the price has stabilized. To illustrate this, let's look at the price of white bread over the same period. The price of white bread was $1.36 at the end of 2019 and remained steady in the early part of 2020. By the end of 2020, the price had jumped 13% to $1.54. In 2021, the price held steady before surging 21% in 2022. Although the growth rate slowed down in 2022, increasing by another 8%, the price of bread has stabilized and eased this year. This trend reminds me of the national inflation picture. As the cost of goods has risen, demand has cooled down, and individuals may not be eating out as much as they used to. This shift suggests that price pressures should ease further when the August personal consumption expenditures are reported at the end of September, supporting more rate cuts by the Federal Reserve and underpinning a steady rally in risk assets like cryptocurrencies. To understand the bigger picture, let's examine the data. If we want to get an idea of what PCE growth looks like, we need to look at the annualized rate. The headline PCE index component breakdown is roughly 35% goods and 65% services, with services having a greater influence on the gauge's direction. Core PCE, which excludes food and energy, is what we should focus on. Food and energy fall under non-durable goods, making up around two-thirds of the PCE goods part, while durable goods make up the other third. The central bank excludes food and energy from the inflation equation because their prices are volatile, leaving us with a core PCE index largely made up of services prices. Now, let's take a closer look at the services component, which accounts for the difference between the BEA and BLS inflation measures. In PCE, housing, including utilities, makes up around 17%, healthcare is about 17%, financial services and insurance are around 8%, other services are almost 8%, food and accommodations are roughly 8%, recreation services are 4%, and transportation is around 3%. According to the BLS, in August, shelter prices rose 0.5%, medical care services contracted 0.1%, financial services decreased 0.3%, insurance costs declined 0.2%, hotel room costs rose 1.8%, recreation services were unchanged, and transportation and warehousing services slid 0.1%. Adjusting these numbers on a weighted basis, we get an almost 0.2% increase for August, in line with the Federal Reserve Bank of Cleveland and consensus expectation for 0.2% growth. If we translate 0.2% monthly growth to an annualized basis, we get 2.7% core PCE, which is in line with Wall Street's expectation but below the Cleveland Fed's forecast of 2.8%. More importantly, the average rate of growth over the last six months would be running at 0.2%, translating to 2.4% core growth on an annualized basis, which is below the current rate and implies that the pace should continue to slow down. If PCE plays out as expected, it will boost the outlook for easier money policies from the Fed, as real interest rates will have a 2.7% cushion to the downside before they stop weighing on inflation growth. In other words, the change will give the central bank plenty of room to start cutting interest rates without causing an inflation rebound, supporting the outlook for economic growth to slow down but not collapse, and underpinning a steady rally in risk assets like bitcoin and ether.