INFLATION SLOWLY ON TRACK

The main takeaway from this week’s important inflation data is that the Federal Reserve is likely to take a more cautious approach to cutting interest rates. Both August consumer and producer price indices reflected continued improvement in inflation but not at the rapid pace that would warrant larger than ordinary rate cuts. In fact, at this point, a series of 50 basis point cuts could signal a Fed growing too concerned about a weakening economy.

Both inflation indices were relatively in line with analysts’ expectations on a year-over-year basis. Monthly levels were marginally higher but not enough to cause the Fed to reverse its position that inflation is moving towards its 2% goal. Lower energy prices were key to keeping inflation at bay for both indices, as well as declines in used car prices. The continued fall in core goods prices fully offset the rise in core services. Housing and auto insurance costs remain the stickiest components of CPI, both of which are considered lagging indicators. Even if interest rates fall drastically, the cost of owning a home will remain high, as demand for housing will only increase, pushing prices upward.

Consumer Credit – Consumer borrowing continues to increase at a rapid pace, with total credit outstanding increasing $25.5 billion in July – the biggest monthly gain since November 2022. Revolving debt rose $10.6 billion, the most in five months. Auto and school tuition loans surged $14.8 billion, the largest gain in over a year. Along with rising debt comes a concern over rising delinquencies. A New York Fed report last month showed that while the share of overall consumer debt in delinquency held at 3.2% in the second quarter, the share of auto and credit card loans that were newly delinquent continued to creep higher. The share of auto loan balances that became at least 30 days delinquent was the largest since 2010. The share of credit card debt that was newly delinquent rose to 9.05%, the most in about 12 years.

Sentiment – Consumer sentiment rose to a four-month high this month on a better inflation outlook. Respondents to the University of Michigan sentiment survey expect prices to rise at an annual pace of 2.7% next year, the slowest pace since December 2020. The expectations index, a measure of future financial conditions, rose to a five-month high as consumers were more upbeat about the economy’s prospects. Consumers viewed unemployment as more worrisome than inflation at this time.

Next Week – The FOMC meeting is next week. This week’s inflation data has the markets flip-flopping between a 25 or 50 basis point cut. The committee will publish the updated quarterly Summary of Economic Projections along with their rate decision. If the projections are anything shy of easing the 140 basis points the futures market is projecting by January 2025, yields could rise.