We believe that it is the pump price of gasoline prominently posted daily at every service station in America that has the most immediate and largest effect on inflationary expectations. It soared earlier this year and so did inflationary expectations, which fell sharply during July and August along with gasoline prices (chart below).
August's CPI is out tomorrow morning and is expected to be down 0.1% m/m led by a big drop in the price of gasoline, following July's flat reading. Excluding food and fuel, the CPI is expected to be up 0.3% during August, the same increase as in July.
Stock prices have been rallying since last week as investors have been anticipating that inflation might not be as persistent as feared earlier this year. Today's report that three-years-ahead inflationary expectations dropped to 2.8%, the lowest since early 2021, was clearly welcomed news. This all confirms our view that inflation peaked in June and that the S&P 500 bottomed on June 16.