Weekly Economic Trends and Indicators

The Headlines:

The Consumer Price Index (CPI) rose at a seasonally adjusted annual rate of 0.2% in July according to the Bureau of Labor Statistics (BLS). This follows an increase of 0.3% in June. The CPI inflation rate over the last twelve months was 2.7% before seasonal adjustment.

The BLS also reported that the Producer Price Index (PPI) for final demand decreased 0.9% in July. The PPI for final demand was unchanged in June.

The Details:

Core CPI (excluding food and energy) was up 0.3%, mostly driven by increases in transportation services and medical care services (both up 0.8%). Energy prices decreased 1.1%.

In the PPI, crude finished consumer foods registered the largest price increase, up 12.8%. This includes wholesale foods for sale to consumers in unprocessed form (fruits, vegetables, eggs, etc.). Prices in this category have been trending down for most of the last year as egg prices have decreased. While there were several foods in this category that increased in price, by far the most significant increase was in fresh and dry vegetables, up 38.9% for the month.

The Context:

The CPI data was released on Tuesday of last week and immediately encouraged speculation that the relatively cool inflation reading would allow the Fed to lower their policy interest rate in September—possibly even by ½ percent rather than the widely anticipated ¼ percent. When the PPI data was released on Thursday, the initial reaction was decidedly negative, with some analysts expressing doubt over whether the Fed could cut rates at all. However, by Friday afternoon, market sentiment was about where it was at the end of the previous week with a high likelihood of a ¼ percent cut.

The big question on everyone’s mind is whether the hotter than expected PPI is a sign that tariffs are raising prices. While the PPI does not measure tariffs or import prices directly, any import price increases caused by tariffs will tend to eventually put upward pressure on domestic prices for the same goods. Tariffs on food products could be pushing up domestic prices. However, other factors could be at work. These price increases are large by recent standards, but not unprecedented. Additionally, for other goods, such as intermediate goods used in manufacturing and construction, the prices have not moved as much.

The PPI is, by its nature, more volatile month-to-month than other inflation measures. Nevertheless, some amount of tariff pass-through will almost certainly take place over the next few months. For now, the economy seems resilient enough to weather the effects if they occur gradually. The question for the Fed is whether they are willing to allow a “one-off” increase in inflation and cut rates now to forestall labor market weakness. So far, the market seems to believe that they will—though some emphasize that this will only be the case if the labor market weakness is real rather than speculative. Everyone will be looking for insight into Fed Chair Jerome Powell's thoughts on this question when he speaks this Friday at a conference in Wyoming. Any potential rate cuts would be gladly welcomed in areas of the country like the Midwest, where inflation has been lower and the labor market slowdown has been more pronounced.

--Bill Polley

Next week: Housing market update