Inflation was in the spotlight this week. During July, both the headline and core measures of the Consumer Price Index (CPI) rose 0.2%. These monthly gains were largely in line with consensus expectations and provided additional evidence that price pressures are still receding. Inflation's descent, however, continues to be gradual. On a year-over-year basis, the core CPI was up 4.7% in July. Recent signs have been more encouraging. The recent string of lower core CPI prints has pushed down the three-month annualized pace to 3.1%, the lowest since September 2021. The downshift in inflation without a material deterioration in economic growth has raised the likelihood of a soft landing, a topic we cover in more detail in our macroeconomic forecast update for August.
That said, by most measures, inflation is still above the Fed's 2% target and the path from here is anything but certain. There is a bit more clarity on the trajectory of shelter costs, which have been a substantial driver of overall inflation over the past year. The pace of shelter inflation has eased in recent months, yet it still is running at a hot rate. Primary shelter inflation, which largely reflect apartment rents, rose 0.4% during July. The CPI's measure of shelter prices tends to significantly lag private measures, which have shown a considerable downshift in rent growth. In addition, apartment demand has been more modest recently, and the pipeline of new apartment construction continues to run at a near-record pace. Together, these factors point to a further moderation in shelter costs in the near term.
Outside of the heavily weighted shelter component, services price changes were mixed in July. Airfares and vehicle rental prices both declined during the month. Medical services inflation softened during the month, while motor vehicle insurance, recreation services and tuition and childcare all rose. All told, core services inflation picked up 0.4% during the month, a more temperate rate compared to earlier in the year, but a mild acceleration relative to June.The climbdown in inflation continues to be aided by smoother functioning supply chains and normalizing demand. Core goods prices dropped 0.3% in July, the largest drop since March 2022. Prices for new and used autos fell during the month. Declines in household furnishings, recreation goods, education and communication goods also contributed to the downdraft.
Evidence that underlying inflation pressures are not intensifying was presented elsewhere this week. The core Producer Price Index (PPI), which excludes volatile food and energy costs, increased 0.3% during July, a tad higher than market expectations. However, over the past year, the core PPI was up 2.4%, similar to June's annual change. Cost pressures also appear to be diminishing for small business owners. Small business optimism bested expectations in July, notching its third consecutive improvement to reach an index reading of 91.9. Small business confidence is still low but has brightened recently alongside more moderate inflation. Consequently, fewer firms are reporting the need to implement price hikes. The net percentage of firms raising prices over the past three months fell to 25%, its lowest level since February 2021.
Inflation expectations also remain well-anchored, at least according to the preliminary results for the University of Michigan's Consumer Sentiment index for August. The top-line sentiment index came in at a reading of 71.2, down slightly from July's reading. The slip in sentiment was in line with consensus estimates and occurred against a backdrop of rising gas prices, announcement of a U.S. debt rating downgrade and ongoing financial market volatility. The inflation expectations components were more encouraging. One-year inflation expectations eased to 3.3% during the survey period, while 5-10 year inflation expectations slipped to 2.9%. Consumers continuing to not anticipate a sharp run-up in prices in the future will come as welcome news to policymakers and bolsters our view that July's 25 bps fed funds rate hike was the last of this tightening cycle. Inflation continues to ease; however, it still remains above target. Until price pressures are convincingly set on a course for 2%, rate cuts still look to be off in the distance.
This Week's State Of The Economy - What Is Ahead? - 01 December 2023
Wells Fargo Economics & Financial Report / Dec 05, 2023
U.S. data released this week indicates the economic expansion remains alive even as inflation continues to slow. The year-ago rates of headline and core PCE inflation were the lowest since March 2021 and April 2021, respectively.
This Week's State Of The Economy - What Is Ahead? - 22 November 2019
Wells Fargo Economics & Financial Report / Nov 23, 2019
Minutes from the October FOMC meeting indicated the Fed is content to remain on the sidelines for the rest of this year as the looser financial conditions resulting from rate cuts at three consecutive meetings feed through to the economy.
This Week's State Of The Economy - What Is Ahead? - 31 March 2023
Wells Fargo Economics & Financial Report / Apr 08, 2023
This week brought glimpses of market stabilization after weeks of turmoil. Although consumers seem unfazed by the uproar, tighter credit conditions coming down the pipeline will likely weigh on growth.
This Week's State Of The Economy - What Is Ahead? - 03 May 2024
Wells Fargo Economics & Financial Report / May 10, 2024
The Federal Reserve can afford patience thanks to a resilient labor market. During April, total nonfarm payrolls rose by 175,000 net jobs, continuing a string of solid monthly payroll additions.
The Regional Breakdown Of A Labor Market In Meltdown
Wells Fargo Economics & Financial Report / May 26, 2020
Employment fell in all 50 states and 43 states saw their unemployment rate rise to a record in April. The damage is already hard to fathom-a 28% unemployment rate in Nevada and still another month of job losses ahead.
This Week's State Of The Economy - What Is Ahead? - 13 August 2021
Wells Fargo Economics & Financial Report / Aug 19, 2021
The general outlook remains positive as households have accumulated over $2T in excess savings on their balance sheets and net worth has risen across all income groups.
This Week's State Of The Economy - What Is Ahead? - 26 April 2024
Wells Fargo Economics & Financial Report / Apr 29, 2024
We got our first look at Q1 GDP, which downshifted to a 1.6% annualized pace and was accompanied by a hot core PCE deflator reading.
This Week's State Of The Economy - What Is Ahead? - 17 May 2024
Wells Fargo Economics & Financial Report / May 23, 2024
The Producer Price Index (PPI) was a bit firm in April, rising 0.5% amid higher services prices, though it did come with slight downward revisions to prior month\'s data.
This Week's State Of The Economy - What Is Ahead? - 25 November 2020
Wells Fargo Economics & Financial Report / Nov 28, 2020
It may be a holiday-shortened week, but there have been as many developments and economic indicators packed into three days as we can recall seeing in any other week this year.
This Week's State Of The Economy - What Is Ahead? - 09 April 2020
Wells Fargo Economics & Financial Report / Apr 10, 2020
The Federal Reserve announced a series of measures this morning that are intended to assist households, businesses and state & local governments as they cope with the economic fallout of the COVID-19 outbreak.