Monday Update: Inflation Continues to Rise

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 16, 2018 1:19:59 PM

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Monday updateLast week’s data was primarily about prices, although we closed with a look at consumer confidence. The week ahead will be a busy one for economic news, with wide-ranging reports. We’ll also get testimony before Congress from Fed Chair Jerome Powell, which should shed some light on how the Fed is likely to react to rising inflation.

Last week’s news

On Wednesday, the producer prices report showed that the headline index, which includes energy and food, rose by 0.3 percent for June. This was down from a 0.5-percent increase in May but above expectations for a 0.2-percent increase. The result came on flat gasoline prices, offset at least in part by rising employment costs and tariff-driven increases in other input prices. The annual change was also above expectations, at 3.4 percent versus 3.1 percent, and is now at a fresh six-year high. Despite the lower monthly growth, longer-term inflation pressures remain elevated above the Fed’s target range. The core index, on the other hand, which excludes energy and food, showed steady growth for the month. It came in at 0.3 percent for both May and June, although the annual figure rose from 2.4 percent in May to 2.8 percent in June on base effects. Rising inflation at the producer level raises the question of when and how much consumer inflation will rise.

On Thursday, the consumer prices report showed less of an increase, despite the larger rise in producer prices. The headline index, which includes food and energy, rose by only 0.1 percent in June. This result was down from a 0.2-percent increase in May, although the annual figure rose from 2.8 percent in May to 2.9 percent in June (a six-year high), on base effects. The core price index did more or less the same; the monthly figure was steady at 0.2 percent, while the annual figure ticked up from 2.2 percent to 2.3 percent, in line with expectations. While increases continue to trail those of producer prices, these figures indicate inflation continues to run above the Fed’s target levels, which should continue to drive interest rate increases.

Finally, on Friday, the University of Michigan consumer confidence survey showed that confidence pulled back a bit, dropping from 98.2 in June to 97.1 for July. With the stock market moving back up and gas prices steady, along with strong labor markets, confidence remains high. But those factors may have been offset by rising concerns around trade. This is still a level well above the long-run average, however, which continues to signal growth. 

What to look forward to

On Monday, the retail sales report showed growth of 0.5 percent for June. This number is down from May’s 0.8-percent growth but is still at a very strong level. This result is supported by a recovery in auto sales growth and is in line with expectations. Core retail sales, which exclude autos, also showed slower growth. The core number was down from 0.9 percent in May to 0.4 percent in June, coming in slightly above expectations for 0.3-percent growth. After a strong series of gains, these numbers still represent healthy growth and confident consumers who continue to spend.

On Tuesday, the industrial production report is expected to tick up. After a decline of 0.1 percent in May, this report should show a 0.5-percent gain for June due to an increase in oil drilling as prices rise. Manufacturing is likely to show an even bigger improvement. Coming off of a 0.6-percent decline in May, which was largely the result of a fire that disrupted auto industry supply chains, this report is expected to rebound for a gain of 0.5 percent in June. If the numbers come in as expected, they would signal continued economic growth.

Chair Powell will testify before the Senate on Tuesday and the House on Wednesday in the regular semiannual session. The markets will be looking for the Fed’s take on the rising trade confrontation and its effects on the economy, as well as what it may mean for interest rates. Currently, no changes are expected.

We’ll also get a look at the housing sector on Tuesday with the release of the National Association of Home Builders (NAHB) Housing Market Index and on Wednesday with the housing starts report. After last month’s pullback due to a drop in lumber prices, the NAHB index is expected to tick up slightly from 68 in June to 69 in July. Housing starts should drop slightly from 1.35 million in May to 1.33 million (annualized) in June. This result would be due to a decline in single-family building permits in prior months. If the housing starts number comes in as expected, it will mean that housing may be experiencing a minor slowdown.

Have a great week!

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