The Independent Market Observer

Monday Update: Consumer Inflation Moderates in July

Posted by Sam Millette

This entry was posted on Aug 16, 2021 11:31:34 AM

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In his Monday Update, Commonwealth’s Sam Millette focuses on July’s inflation news and consumer confidence in August, as well as housing and retail sales.Last week saw a number of important economic data releases, with a focus on July’s inflation reports and a first look into consumer confidence in August. Consumer inflation slowed in July compared with data from June, but the overall level of inflation remains elevated. This will be another busy week for updates. Highlights will include reports on the housing sector as well as retail sales in July.

Last Week’s News

On Wednesday, the Consumer Price Index for July was released. Consumer prices rose by 0.5 percent during the month, which was in line with economist expectations. This result represents a notable slowdown compared with the 0.9 percent increase in prices we saw in June. On a year-over-year basis, headline consumer prices increased by 5.4 percent, which was slightly above economist estimates for a 5.3 percent annual inflation rate. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.3 percent during the month and 4.3 percent year-over-year. These numbers were largely in line with the forecasts, which called for increases of 0.4 percent and 4.3 percent on a monthly and year-over-year basis, respectively. The report showed a slowdown in inflationary pressure in certain sectors affected by reopening efforts, including air travel and used cars. The moderating inflation for these sectors supports the Fed’s view that much of the recent rise in prices will ultimately prove to be transitory.

Thursday saw the release of the Producer Price Index for July. Producer prices increased by 1 percent during the month, against calls for a more modest 0.6 percent rise. On a year-over-year basis, producer prices increased by 7.8 percent, in a result up from June’s 7.3 percent annual inflation rate and higher than economist estimates for 7.2 percent. Core producer prices, which strip out the impact of food and energy costs, also increased by 1 percent during the month. Calls were for a 0.5 percent increase. Core producer prices were up 6.2 percent on a year-over-year basis. As was the case with consumer prices, certain sectors affected by the reopening saw price growth moderate in July. Overall, however, producer inflation remains historically high due to high levels of demand, supply chain constraints, and material shortages. Recently, producers have had to contend with labor shortages, which have also increased inflationary pressure.

Thursday also saw the release of the initial jobless claims report for the week ending August 7. There were 375,000 initial claims filed during the week, in an improvement from the upwardly revised 387,000 initial claims filed the week before and in line with economist estimates. This report marks three consecutive weeks with declining initial jobless claims. The number of weekly initial claims is now near the pandemic-era low of 368,000 initial claims recorded in the first week of July. Improvements on the medical front and associated reopening efforts this year have led to this notable decline in claims. The pace of recovery has slowed since June, however, as increased risks from the Delta variant have served as a headwind to more progress. Nevertheless, the continued decline in the number of initial unemployment claims in August is a good sign for the overall labor market recovery.

We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for August. This widely monitored gauge of consumer confidence fell by more than expected to start the month. It dropped from 81.2 in July to 70.2 in August against forecasts for no change. This surprising result brought the index to its lowest level since 2011. The decline was largely driven by worsening consumer views on the economy, as the subindex measuring future expectations fell from 79 in July to 65.2 in August. Rising medical risks and persistent worries about inflation negatively affected consumer confidence. Furthermore, the current conditions subindex also declined by more than expected. Historically higher levels of confidence have supported faster consumer spending growth, so this sharp decline for the index is a concerning signal for future consumer spending. Given that consumer spending is the major driver for the overall economic growth, this area should be closely monitored in the months ahead.

What to Look Forward To

We’ll start the week with Tuesday’s release of the July retail sales report. Sales are expected to decline by 0.3 percent during the month, after rising by 0.6 percent in June. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to remain flat, following a 1.1 percent surge in June driven largely by reopening-induced spending. High-frequency spending data showed that consumers continued to spend at newly reopened bars and restaurants in July. This is an encouraging sign that rising medical risks have not yet had a major impact on consumer spending. That said, a continued slowdown in auto sales is set to weigh on overall sales growth during the month. But, as sales have already recovered well past pre-pandemic levels, more moderate growth is expected as long as the economic recovery continues.

Tuesday will also see the release of the National Association of Home Builders Housing Market Index for August. This measure of home builder confidence is expected to remain unchanged at 80. This is a diffusion index, where values above 50 indicate growth, so the anticipated result would signal continued strength for new home construction. Home builder confidence rebounded swiftly following the end of initial lockdowns last year. If estimates hold, this report would mark 14 straight months of growth, keeping the index above the pre-pandemic high of 76 recorded in December 2019. Throughout the year, home builder confidence has been supported by strong levels of home buyer demand and low supply of existing homes for sale. Nonetheless, during this period, rising costs have served as a headwind for faster new home construction.

Speaking of new home construction, Wednesday will see the release of the July building permits and housing starts reports. Permits are expected to increase by 1 percent during the month, following a 5.1 percent decline in June. Starts are set to fall by 2.3 percent in July, after seeing a 6.3 percent increase in June. Both of these measures of new home construction remain above pre-pandemic levels, however, supported by high home buyer demand and low supply of existing homes for sale. Although rising material costs have served as a headwind for faster construction throughout much of the year, a fall in lumber prices in July could support additional single-family housing starts. Housing has been one of the strongest sectors of the economy throughout this recovery, driven by record low mortgage rates and shifting home buyer preferences due to the pandemic. July’s reports on buildings permits and housing starts are expected to show continued strength for this important area of the economy.

Wednesday will also see the release of the FOMC meeting minutes from the Fed’s recent July meeting. The Fed cut interest rates to virtually zero last March in response to the pandemic, and rates are not expected to change until at least 2023. No major changes to monetary policy were made at the July FOMC meeting, but we did get hints the Fed may be considering a change to its asset purchase program. Currently, the central bank purchases $120 billion a month in Treasury and mortgage-backed securities, but economists widely expect the Fed to taper these purchases by the end of this year or in early 2022. The minutes are expected to indicate the potential path and timing of any purchase tapering. It should be noted, however, that the Fed will likely telegraph its tapering plans well before making any changes, in order to minimize the potential market impact.

On Thursday, the initial jobless claims report for the week ending August 14 will be released. Economists expect to see 365,000 initial claims filed during the week, in an improvement from the 375,000 initial claims filed the week before. If estimates prove accurate, this result would represent the lowest number of initial claims in a week since the start of the pandemic. It would also mark four straight weeks with declining initial jobless claims. Throughout the course of the year, we’ve made solid progress in lowering initial jobless claims. The continued momentum from recent reopening efforts is expected to drive further improvements despite the rising medical risks. Looking forward, continued labor shortages and the expiration of enhanced unemployment benefits are expected to serve as a tailwind for further improvements. Still, increased uncertainty caused by the continued spread of the Delta variant remains a risk to the labor market recovery we should monitor.

That’s it for this week—thanks for reading! 


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