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The Federal Reserve was able to put a check mark against the July inflation report this week, putting it one step closer to gaining confidence that inflation is on the downward path. Consumer prices year-over-year came in at 2.9%, the slowest pace since March 2021, finally breaking the 3% barrier. Monthly headline and core inflation rose 0.2%, only a slight pickup against the unusually low readings in June. Keep in mind, the new trend in evaluating inflation data is to carry the percentages to the third decimal point. Core inflation actually rose 0.165%, still with a 0.1% handle but, per convention, rounded to 0.2%. The three-month annualized rate is at 1.58%, the lowest since the beginning of 2021.
Consumer prices have settled down for the past three months. Prices for new and used autos, airfares, energy and clothing continued to fall after spiking earlier this year. Food prices rose 0.2% for the second month with most of that increase coming from food away from home. While it may be more fun to eat out, the financial balance continues to lean toward eating at home. Ninety percent of the index’s increase came from shelter costs, rising 0.4%. It has been widely noted by economists that the government data lags behind real-time changes in housing and rental costs. We may not see the beneficial impact from lower rental prices for months to come. The saving grace, at least for the Fed, is that shelter prices do not factor into Personal Consumption Expenditures (PCE) as much as the Consumer Price Index (CPI), so the third inflation indicator may appease the Fed more. July’s inflation report is positive and allows the Fed to feel confident inflation is “moving sustainably” towards its 2% target.
KEY INDICATORS THIS WEEK
Retail Sales – Consumers have not put away the debit or credit card just yet. Retail sales rose 1.0% in July, the largest monthly gain since January 2023. Sales were still strong, up 0.4%, when auto sales are removed from the count. Auto sales rose 4%, a nice comeback from the large drop in June, due to a ransomware attack that affected auto dealers. Ten of the 13 major categories posted increases, with clothing, sporting goods and miscellaneous sales (i.e., florists, jewelry stores, pet supplies, etc.) in the red. Amazon’s Prime Day promotion pushed online sales up 0.2%, as 28% of major U.S. retailers and ecommerce sites hosted their own sales events around Prime Day or benefitted from it.
Bottom Line – Where does the Fed stand after the last couple of weeks of data? Likely ready to begin its rate cutting phase in September but at a measured pace. The labor market is slowing, but steady. Inflation appears to have stabilized enough. The consumer is finding plenty of price deals to keep spending. Taken together, the data at this point allows the Fed to start with a 25-basis point cut on September 18.
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