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July’s inflation data presented a picture of continued inflation slowing but stopped short from suggesting the Federal Reserve is ready to call it quits. Both the consumer headline and core rates rose 0.2% for the second month in a row. In fact, the back-to-back gains in the core rate were the smallest in more than two years. Year-over-year inflation rates were only slightly changed from the previous reading, with the headline rate rising to 3.2% while core fell a tenth of a percent to 4.7%. There was a lot to be happy about in the report. Core goods prices, which exclude food and energy, fell the most since May 2022. The decline was led by a 1.3% drop in used car prices. Other price declines included airfares falling 8.1% for the second month in a row, medical care services down 0.4% and a deceleration of energy prices from June. Housing costs continue to be sticky, with shelter costs rising 0.4% in June, but economists predict the tide is turning on this. As apartment construction begins to reach the overbuilt stage, rental prices should fall.
Consumer inflation is just one part of the inflation story. Wholesale inflation, measured by the PPI report, rose 0.3% in July at both headline and core levels. These are the largest monthly increases since at least January. Most of the gain came from services costs, which rose the most in nearly a year. The biggest driver was a 7.6% jump in portfolio management. Some analysts are choosing to discount this factor as it reflects higher interest rates and strong stock investment activity, normal at this time in the cycle. Yet, the higher costs of transportation, trade services and hospital outpatient care are significant enough to warrant keeping an eye on wholesale inflation pressures. The positive news is that goods costs continue to fall.
The fed funds futures market is betting on the Federal Reserve rate-setting committee to take another break in September and not raise the benchmark lending rate. July’s consumer inflation data gives the Fed ample reason to believe price pressures are softening, but the wholesale data provides enough concerns to keep the Fed on course. It is too early for the central bank to claim victory and suspend future rate increases. Energy costs began to rise late in July and the price of oil was up over 15% for the month, two factors that will likely show up in manufacturing and transportation costs in future months. Wages continue to make the inflation issue sticky. Average weekly earnings rose 1.1% in July. While this was an improvement over the 1.3% rise in June, the two months of data are a turnaround from months of declining earnings. The Federal Reserve is still hoping for some cooling off in the labor market as it tries to rein in inflation. July’s wage data points to the opposite. As of now, September should still be considered a live meeting as far as I, and probably the Fed, are concerned.
Key Indicators this Week
Consumer Sentiment – Inflation is definitely on the minds of consumers, affecting the outlook on their financial situation. The University of Michigan Sentiment Index came in as expected at 71.2, mostly on improved inflation outlooks. One and five-year inflation expectations fell to the lowest levels in almost a year. The measure of current conditions increased to the highest level since October 2021. While a third of University of Michigan Sentiment survey respondents said higher costs are eroding their lifestyle, the report showed that buying conditions for long-lasting goods were the most favorable in over two years.
Sarina Freedland – Senior Investment Officer
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