CPI Cools as Expected, Shelter Prices Gain Momentum

This morning, the CPI rose 0.2% in July, as expected and following a 0.1% decline in June. Year-over-year, consumer prices rose 2.9%, a tenth of a percentage point below expectations and down from the 3.0% annual increase in June.

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Food prices rose 0.2%, while energy prices were unchanged following a 2.0% decline in June. Excluding food and energy costs, the core CPI rose 0.2% in July, as expected and following a 0.1% gain in June. Year-over-year, the core CPI increased 3.2%, down from the 3.3% annual gain in June and the slowest pace in since April 2021.

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In the details of the report, shelter prices rose 0.4% with a similar gain in OER (Owners’ Equivalent Rent), both marking the largest gains in two months. Also, other goods and services costs rose 0.2%, and recreation prices increased 0.1% in July following a similar rise the month prior. Additionally, education and communication prices rose 0.2%, the most in three months.

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On the other hand, transportation prices fell 0.1%, due to a 0.2% decline in new vehicle prices and a 2.3% drop in used cars and trucks prices. Additionally, airline fares declined 1.6%, marking the fifth consecutive month of a decline. Additionally, medical care prices fell 0.2%, and commodities prices slipped 0.1% in July.

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Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.2% in July following a 0.1% decline the month prior. Over the past 12 months, the supercore increased 4.4%, down from the 4.6% annual increase in June and the smallest annual gain in five months.

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Yesterday, the PPI rose 0.1% in July, a tenth of a percentage point less than expected and following a 0.2% gain the month prior. Year-over-year, producer prices rose 2.2% in July, down from the 2.6% annual gain in June and marking the smallest annual increase since April.

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Food prices rose 0.6% and energy prices increased 1.9% in July following two consecutive months of decline. Excluding food and energy costs, the core PPI was flat (0.0%), the smallest reading in seven months and following a 0.3% rise in June. Year-over-year, the core PPI increased 2.4% in July, down from the 3.0% annual gain in June and the smallest annual increase in three months.

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Excluding food, energy and trade, however, producer costs rose 0.3%, the largest monthly gain in three months. Over the past 12 months, the PPI excluding food, energy and trade rose 3.3%, the hottest reading since May.

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Additionally, services costs fell 0.2%, due to a 1.3% decline in trade costs. Transportation and warehousing costs, however, rose 0.4% at the start of the third quarter.

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Bottom Line: A cooler-than-expected headline CPI coupled with another month of waning producer price pressures further strengthens the argument for a near-term rate reduction in the federal funds rate as inflation slowly moves closer to the Committee’s 2% target. There remain, however, some notable points of concern in the July data regarding a sustainable disinflationary trajectory, including an uptick in the ex-trade component of the core PPI, a hefty increase in the OER, taking the shelter component in the CPI to a two-month high, as well as a stubbornly elevated level in the supercore, still more than double the Committee’s target.

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Of course, details aside, if the more favorable headline descent is confirmed by the July PCE report released on August 30, even the skeptics among the Committee are going to find it difficult to fend off the Doves ready to initiate liftoff towards a less firm policy stance. That being said, with the data still volatile and bumpy, even amid another month of broadly improving conditions, the pace of rate cuts is likely to be very slow and tempered, disappointing investors’ expectations for a rush back to neutral, let alone an accommodative stance.?

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Speaking of policy easing, New Zealand's central bank is the latest to reduce its benchmark rate, opting to cut its official cash rate by 25bps from 5.50% to 5.25% in a surprise move yesterday. After raising rates from an earlier low of 0.25%, this marks the first?cut since March 2020 and comes nearly a year ahead of schedule, according to the central bank’s own forecast.?The decision follows earlier rate cuts by the EU, U.K. and Canada, as the Fed continues to deliberate over the timing for its first move.?

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Also this morning, MBA mortgage applications jumped 16.8% in the week ending August 9 following a 6.9% increase the week prior. The 30-year mortgage rate, meanwhile, fell by 1bp to 6.54%.

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Also yesterday, the NFIB Small Business Optimism Index unexpectedly rose from 91.5 to a reading of 93.7 in July, the highest reading since February 2022. According to the median forecast, the index was expected to remain unchanged at a reading of 91.5 for a second consecutive month. In the details of the report, the proportion of small business owners that planned to hire in the next three months remained at 15%, as it has since May.

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Tomorrow, initial jobless claims are expected to tick up from 233k to 235k in the week ending August 10. Also tomorrow, another key report – July retail sales – will be released.

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Consumers are still out in the marketplace spending but doing so at a noticeably slower pace than over the past couple of years, particularly as younger and lower-income consumers more heavily adjust spending, reducing the amount of nominal dollars spent and reallocating expenditures towards services and away from goods. Last month, retail sales were unchanged in June (better than the 0.3% decline expected) and rose 2.3% on an annual basis, the smallest gain in four months. This month, retail sales are expected to rise 0.4% in July.

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Wrapping up the week, on Friday, July housing starts and permits, and the preliminary University of Michigan Consumer Sentiment Index for August.

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-Lindsey Piegza, Ph.D., Chief Economist