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[Quick Facts]

1. U.S. shelter inflation may go negative next year.

2. Bowman says additional rate increases will likely be needed to lower inflation to the target.

3. Williams says the current labor force growth is a rebound and the unemployment rate may rise next year.

4. Russia's oil processing volume rises in early August.

5. Japan's wage growth unexpectedly slows.

[News Details]

U.S. shelter inflation may go negative next year

The U.S. San Francisco Fed released a research report on Monday, August 7, pointing out that shelter inflation, the largest component of the U.S. CPI, will likely slow down significantly and may even go negative next year. Benchmark forecasts indicate that shelter inflation will keep slowing year-on-year until the end of 2024, and may even go negative by the middle of 2024. This would represent a sharp reversal of shelter inflation, which will have an important impact on headline inflation.

Shelter comprises more than 40% of the core CPI basket in the U.S. So-called core measures, which strip out volatile food and energy prices, have been slower to recede, leading to worries that it could take more tightening to bring inflation down to the Fed's 2% goal.

Bowman says additional rate increases will likely be needed to lower inflation to the target

Fed Governor Michelle Bowman said she supported the latest interest rate hike last month, because inflation is still too high, job growth, and other signs of economic activity show that the economy continues to expand at a "moderate pace." She predicted that further rate hikes may be needed to bring inflation down to target levels. And she will be looking for evidence that inflation is on a sustained and meaningful downward path as she considers whether further increases in the federal funds rate are needed and how long it needs to remain at a sufficiently restrictive level.

Williams says the current labor force growth is a rebound and the unemployment rate may rise next year

In an interview with the New York Times on Monday, Fed John Williams said he wanted to emphasize that the large amount of labor force growth seen over the past year or so has been a rebound and an indication of a return to strong labor market conditions after the pandemic, but this is unlikely to continue every year ahead. If fundamentals return to more normal levels, then job growth will need to fall back to a level consistent with the potential labor force, which is much lower than it is now. As for the unemployment rate, he expected it to return to a more normal level, possibly rising above 4% next year, but this will depend on a number of factors.

Russia's oil processing volume rises in early August

With state subsidies set to be halved from September, Russian refiners increased their crude processing volume in the first days of August. The primary processing volume averaged 5.64 million barrels on August 1 and 2, a person familiar with the matter said. This is about 24,000 barrels per day higher than the average for most of July. Currently, oil market observers are closely watching Russian crude supplies to its domestic refineries as well as seaborne exports to track the country's production trends. In addition to limiting production, Russia will voluntarily reduce exports this month and next, said Russia's Deputy Prime Minister Alexander Novak last week. And in an effort to limit budget spending, subsidies paid for domestic diesel and gasoline supplies will be cut in half from September of this year through 2026.

Japan's wage growth unexpectedly slows

Nominal cash earnings for Japan's workers rose at an annual rate of 2.3% in June, according to data released by Japan's labor ministry on Tuesday, with the rise slowing from a revised 2.9% in the previous month and missing market expectations for a 3% rise.

The real cash earnings declined by 1.6% from a year earlier, while economists had expected a 0.9% drop. The weak wage data was a blow to the Bank of Japan (BOJ).

A deepening decline in real earnings could put pressure on consumption, forcing retailers to hold down prices through promotions and other activities to attract consumers. In light of this, Tuesday's data could support the BOJ's recent assessment that Japan is still some way off from sustained price gains above 2%, and thus will need to keep its ultra-loose policy in place for the time being.

[Focus of the Day]

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