Monday Update: Inflation Heats Up and New Tariffs Take Effect

Posted by Sam Millette

This entry was posted on Sep 16, 2019 2:00:21 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette looks at what’s driving inflation and discusses expectations for the FOMC rate decision.Last week, we focused on inflation and the consumer, with the release of August’s reports on producer prices, consumer prices, retail sales, and consumer confidence. This week, we’ll see if home builder confidence remains steady and whether the Fed will cut rates.

Last week’s news

We started off the week with Wednesday’s release of the Producer Price Index for August. As expected, producer prices increased by 0.1 percent during the month and 1.8 percent year-over-year. Core producer prices, which strip out the impact of volatile food and energy prices, came in higher than expected, with 0.4 percent monthly growth and 2.3 percent year-over-year growth. This increase largely offset the surprising 0.3 percent decline in core producer inflation in July. Producer inflation appears to be picking up, so there may be more upward pressure coming, as additional tariffs on Chinese goods came into effect on September 1.

Thursday saw the release of the Consumer Price Index for August. As was the case with producer prices, consumers saw prices rise during the month, with 0.1 percent monthly growth and 1.7 percent year-over-year growth. Headline consumer inflation came in slightly below expectations, with year-over-year growth at 1.8 percent. This result was largely due to a drop in gasoline prices during August. Core consumer inflation, which strips out the impact of food and energy prices, came in higher than expected, with 0.3 percent monthly growth and 2.4 percent year-over-year growth. This increase brought the annual core consumer inflation rate to its highest point in 11 years. Consumers are starting to feel the effects of the ongoing trade war, as prices for home furnishings and recreational goods have grown markedly over the past year. Going forward, the September tariffs will likely add more pressure on consumer prices. The most recent tariffs were imposed on additional categories of consumer goods that had been spared up to this point in the trade war. 

Despite the rise in consumer prices this year, consumer spending has been a bright spot in the economy. On Thursday, that trend continued with the release of the August retail sales report. Sales came in better than expected, with 0.4 percent growth against expectations for 0.2 percent. This news follows a strong 0.7 percent increase in July. With August marking the sixth straight month of growing retail sales, we can see that consumers have been powering the ongoing economic expansion. Consumer confidence has remained strong in the face of rising inflation and uncertainty related to the trade war, and consumers have been more than willing to translate high confidence levels into additional spending.

Speaking of confidence, we finished the week with Friday’s release of the University of Michigan consumer sentiment survey for September. The survey rose from 89.8 in August to 92 in September, against expectations for a modest increase to 90.8. Confidence dropped in August in large part due to the market volatility during the month. So, it is encouraging to see this rebound now that markets are approaching all-time highs. Lowered gas prices and continued low jobless claims also likely helped support this rebound in confidence. Despite the increase in September, the survey remains well below levels seen earlier in the year, so this will be an important data series to monitor.

What to look forward to

Tuesday will see the release of the August industrial production report, which is set to show 0.2 percent growth following a 0.2 percent decline in July. A rebound in manufacturing output, which was one of the major drivers of the July decline, should offset lower-than-expected utilities production. If manufacturing output shows the growth that economists forecast, it would help calm fears of a larger slowdown in manufacturing following recent declines in manufacturer confidence.

Also on Tuesday, the National Association of Home Builders Housing Market Index is set to be released. Home builder confidence is expected to remain steady at 66 in September. Although home builder confidence has recovered well from a plunge at the end of 2018, the index still sits below recent highs seen at the end of 2017 and the beginning of 2018.

Wednesday is set for the release of August’s building permits and housing starts data. Housing starts are expected to increase following an increase in permits in July. This increase would be welcome given the shortage of new homes in key markets.

The FOMC is meeting this Tuesday and Wednesday to discuss the state of the economy and set the federal funds rate. The FOMC rate decision will be released Wednesday afternoon. Economists widely expect the FOMC to lower the upper bound of the federal funds rate from 2.25 percent to 2 percent at this meeting, as the Fed continues to cut rates in order to support the economy in the face of slowing international trade. Markets have priced in two more rate cuts this year.

Thursday will see the release of August’s existing home sales report. It is expected to show sales declining by 0.9 percent in August, following a surprisingly strong 2.5 percent increase in July. Despite the anticipated monthly decline, sales are expected to show growth on a year-over-year basis. This would mark the second straight month that year-over-year existing home sales have grown following 17 months of declines.

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

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