Third, even though the consumer price index (CPI) has continued to climb more than anticipated, Hooper noted that its service portion may be moderating. It only increased by 0.4% month over month and the index for services for intermediate demand remained unchanged in June, after seven consecutive advances. So, she took that as a good sign that the CPI climb may be turning the corner.
Longer-term inflations expectations are also becoming better anchored. Hooper noted that several recent surveys have shown that, while there was an increase in one-year inflation expectations, there was a decrease in three to five-year expectations. She noted that the surveys confirm that longer-term inflation is “becoming slightly better anchored, which arguably could provide the Fed with the cover to not tighten policy so significantly that a recession ensues.”
Fifth, China’s economy is beginning to rebound. While its second-quarter economic growth was disappointing with only 0.4% year-over-year gross domestic product growth because of COVID lockdowns, June saw a solid rebound as pandemic restrictions were eased.
“We continue to expect an economic recovery in the second half, led by industrial production and infrastructure investments, due to pro-growth policies,” said Hooper.
China’s COVID situation is also improving. Cities have reopened and economic activity is improving. But, there are concerns that wide-scale lockdowns could reoccur with the recent rising infection rates. Hooper doubted that would happen, given that China’s COVID policy has evolved so there’s daily COVID testing and smaller neighbourhoods, rather than larger geographical areas, could be locked down. That allows policymakers to quickly contain increased infections before they spread.
