New inflation figures are expected to be tame, though investors are betting it's about to pick up

Published Tue, Aug 11 20205:25 PM EDTUpdated Tue, Aug 11 20205:30 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

Some investors have been using TIPs and other trading strategies to hedge themselves against rising inflation, but the debate is raging on about whether inflation will start to rise in the next year, as expected by some.
Analysts said Wednesday's CPI report could be an important update on consumer price inflation, which some expect could start to rise next year.
Core inflation is expected to have risen by 0.2% in July , or 1.2% annualized.

Some investors are betting that the Covid-19 economic recovery will bring something the return from the financial crisis never did - inflation. In the past month, the dollar has lost 3% and gold has gained nearly 7% on the idea that inflation will grow along with the ballooning U.S. budget deficit. That trade was unwinding on Tuesday, as investors took profits out of what has become very crowded positions, and gold fell 6%. The next reading of Inflation is Wednesday at 8:30 a.m. when July's consumer price index is reported. Inflation readings have been very tame, and the July number is expected to be much of the same. Core CPI is expected to rise by 0.2%, or 1.2% on an annualized basis, according to Dow Jones. Core, which excludes energy and food, rose the same amount last month. Headline CPI is expected to rise by 0.3%, after rising 0.6% in June. "I think reflation will be the next big macro theme, but it's not a Q3 issue," said Ian Lyngen, chief fixed income strategist at BMO. He said inflation is an issue for next year. "The big issue right now is the employment market and how quickly that takes to heal." Some economists and the Fed have said deflation may become a worry with the high number of unemployed keeping demand soft for consumer goods. "I think inflation is far more complicated than that," said Stephen Stanley, chief economist at Amherst Pierpont. Stanley said he disagrees with the Fed, and he expects consumer spending may be pent up and that could drive prices higher. "Federal assistance has been so generous that personal income is up," Stanley said. "This is one where people have the wherewithal to spend but they don't have the ability to spend on a lot of items they'd like to...They can't go out to dinner, the theatre or to travel." He expects CPI will come in above the consensus forecast, just like PPI producer inflation data did on Tuesday. Stanley expects an increase of 0.4% and a gain of 0.3% on core. The producer price index rose 0.6%, driven by a jump in energy prices. He said one factor that could be a positive for CPI this July is that seasonal adjustments take into account discounting in July. However, there were not the same types of summer closeout sales this year. "The normal seasonal pattern may not apply this year, as retailers are in the process of getting back to a more normal demand environment and with supply constrained in a number of sectors, such as motor vehicles, discounting may have been less prevalent in July for some line items than the seasonals assume," he noted. Michelle Meyer, head of U.S. economics at Bank of America, said one wildcard in the CPI could be the category that equal's housing costs, owners equivalent rent or OER. "Last month, it was quite soft. OER is one of the most sticky components," she said. 'It's a good gauge of underlying inflation pressure. Shelter is really important. "Landlords don't have pricing power. That's a critical swing factor in my view." Meyer does not see inflation on the horizon in the near term. "I think medium term it's a story of disinflation," Meyer said.

Shoppers search for items at a Costco Wholesale store August 4, 2020 in Colchester, Vermont.

Robert Nickelsberg | Getty Images

Some investors are betting that the Covid-19 economic recovery will bring something the return from the financial crisis never did - inflation.

In the past month, the dollar has lost 3% and gold has gained nearly 7% on the idea that inflation will grow along with the ballooning U.S. budget deficit. That trade was unwinding on Tuesday, as investors took profits out of what has become very crowded positions, and gold fell 6%.

The next reading of Inflation is Wednesday at 8:30 a.m. when July's consumer price index is reported. Inflation readings have been very tame, and the July number is expected to be much of the same.