By Greg Heym, Brown Harris Stevens Chief Economist and host of Crossing The Line
How’s that for a happy headline? The consumer price index rose 0.2% in July and was 2.9% higher than a year ago, its lowest annual increase since March 2021. Both those figures were in line with expectations. Core CPI—which excludes food and energy prices—increased 0.2% last month and 3.2% over the past year, also in line with expectations. Core inflation is rising at its slowest pace since April 2021.
Housing continues to be the biggest driver of inflation, accounting for nearly 90% of the monthly increase in the headline CPI figure. Remember that housing inflation is calculated using six-month intervals, so changes in the cost of housing can take months to show up in the CPI data.
We also got good news from the producer price index, which rose less than expected in July.
So, all good here on the inflation front, but the big question is how much will the Fed cut rates next month? There was a big push for a 0.50% cut after the weaker-than-expected July employment report. The counter to that argument was that inflation was still above the Fed’s 2% target, and they shouldn’t start cutting aggressively because of one bad jobs report. Here’s an interesting article on why the Fed has a 2% target rate, since I’m sure you’ve been wondering. Spoiler alert; it has something to do with New Zealand.
I think they will go 0.25%, especially after the July retail sales report, which not so coincidentally is our next item.
Consumer Spending Much Higher than Expected in July
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Retail sales rose 1% last month, easily beating the 0.3% estimate. Some analysts will point out the 3.6% jump in motor vehicle sales—due in part to a cyberattack that disrupted sales in June—makes this number look better than it actually is. But when you exclude autos, retail sales were still up 0.4% and beat the 0.1% forecast.
So, despite reports to the contrary—some of which were written by me—the consumer is still out there spending. And remember that since consumer spending comprises about 70% of GDP, this bodes well for economic growth in the third quarter.
Since we have some room left, let’s throw in one more piece of good news.
Weekly Jobless Claims Unexpectedly Fall
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235,000 Reuters forecast. It’s important to point out that most weekly data can be volatile, as proven two weeks ago when jobless claims hit their highest level in almost a year. But let’s not worry about that now and just enjoy the good news.
To sum up today’s column, while there is some important data coming about before the Fed’s September meeting which includes August reports on jobs, prices, and retail sales, I would still bet they cut 25 basis points. The economy is just not weak enough yet to justify a 50-basis point cut that could possibly reverse some of the progress made on inflation so far.