Inflation Reports Show Improvement, but Will It Last?

Inflation Eases, But Risks Remain

Mortgage rates generally improved after last week’s sharp increase. Much of the improvement is due to the Consumer Price Index (CPI) and Producer Price Index (PPI) inflation reports that were released by the Bureau of Labor Statistics (BLS).  Retail sales also showed continued resilience in the face of weak economic conditions and elevated energy prices. Pending home sales also broke a 4-month streak of gains in June. Housing starts were almost completely concentrated in the multi-family sector.

CPI Shows Sharp Drop on Gasoline

June’s CPI showed a headline fall of 0.4% month-over-month vs expectations of a 0.1% fall. Year-over-year inflation fell from 4.2% to 3.5%. Markets expected to hit 3.8% or 3.9%. June saw a nearly 10% drop in gasoline prices due to some level of normality being restored in the Persian Gulf. Now that we have seen hostilities resume, it is likely that these inflation numbers will increase. 

Core CPI Finally Reflects Cooler Shelter

The Core CPI for June, stripping out volatile food and energy prices, was reported at -0.02%, essentially 0% and much better than the 0.2% increase expected. Year-over-year, Core inflation declined from 2.9% to 2.6%. 45% of Core CPI is Shelter costs and it appears to be catching up with reality. Shelter’s component showed a 0.1% rise in rental prices, much closer to other real-time estimates. There was also a decline of 2% in Motor Vehicle Insurance and flat Services inflation.

Producer Prices Fall on Energy Relief

On the wholesale inflation front, we got June’s PPI report. Like CPI, PPI generally was better than expected chiefly due to the lower energy prices we saw during the month.  Headline inflation fell 0.3%, better than estimates of 0%. In addition, negative revisions to the May numbers brought the May figure down from 1.1% to 0.6%.  It is a shame May wasn’t more accurate as we saw a rise in rates due to the hotter than expected May number.  Year-over-year, Headline Producer Inflation fell from 6% to 5.5%.  Markets were expecting 6.5%.  The BLS said that two-thirds of the drop was due to lower gasoline prices, which fell by 12%.

Core PPI Improves, But Fed Unmoved

Core PPI for June rose by 0.2%, about half of market estimates. The previous May reading was revised lower from 0.4% to 0.1%.  Year-over-year Core Producer Inflation rose from 4.6% to 4.7%. The previous reading was revised lower from 4.9% to 4.6%.  Markets were expecting a 5.2% increase for June. Fed Chairman Kevin Warsh on Tuesday told House lawmakers that the June decline in prices did not represent a “mission accomplished” moment for inflation. They are going to be looking at more than just one monthly report.

Retail Sales Hold Up on Higher Earners

Retail sales rose 0.2% in June, as markets expected. May’s report was revised higher by 0.1%. The increases may be due to the lower gasoline prices in June. The control group, which is important because it is directly plugged into GDP and strips out automobiles, gasoline, building materials, and food rose 0.5% which is strong. There is a clear split, however, that retail sales are being buoyed by higher income earners. The lower income earners are still struggling.

Housing Softens as Rates Weigh on Buyers

Pending Home Sales, which measures signed contracts on existing homes, fell 5.4% in June. This represents a slowdown in house shopping in May and is likely a result of the higher mortgage rates. Year-over-year sales are down 0.3%. The increase in housing starts was concentrated in the multi-family sector with single-family starts at the lowest level of the year. Builder confidence has fallen to 34 from 36 on the National Association of Home Builders (NAHB) Housing Market Index. This reflects more pessimism from builders.

Looking Ahead: Next Week is a Quiet News Week

• Tuesday, July 21: ADP Weekly Employment Data
• Wednesday, July 22: 20-year Bond Auction
• Thursday, July 23: Jobless Claims
• Friday, July 24: New Home Sales