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Economic & Housing Weekly Note

Falling Energy Prices Temper July Inflation

August 12, 2022

Key Takeaways:

  • The Consumer Price Index (CPI) was flat in July, the first time it did not increase since May 2020, according to the Bureau of Labor Statistics (BLS). On an annual basis, prices were up 8.5 percent, a deceleration of six-tenths compared to June. Gasoline prices were a major drag, falling 7.7 percent over the month. Other major negative categories that declined in July included airline fares (-7.8 percent), apparel costs (-0.1 percent), and used car and truck prices (-0.4 percent). Food prices continued their rapid acceleration, rising 1.1 percent over the month and 10.9 percent annually. Shelter costs were also up as rent increased 0.7 percent and owners’ equivalent rent (OER) rose 0.6 percent, a deceleration of one-tenth for each compared to June. Excluding food and energy, core CPI increased 0.3 percent over the month, a deceleration of four-tenths, and 5.9 percent over the year.
  • The Producer Price Index (PPI) declined 0.5 percent in July, the first time it did not increase since November 2020, according to the BLS. The PPI was up 9.8 percent from a year ago, a deceleration of 1.5 percentage points from June. Similar to CPI, the headline number benefited from a 9.0 percent drag for final demand for energy. Still, core PPI (less food, energy, and trade services) only increased 0.2 percent, the smallest monthly gain since February. Further, final demand for services increased only 0.1 percent over the month and was up 6.9 percent annually, a deceleration of one percentage point.
  • The National Federation of Independent Business Small Business Optimism Index rose 0.4 points to 89.9 in July, the first increase since December. Twenty percent of firms plan to increase employment, up one percentage point from June, while 22 percent of firms plan to make capital outlays, a decline of one percentage point. The percentage of firms increasing average selling prices was 56 percent, down 7 points from last month and the lowest percentage since October 2021. Additionally, the share of firms planning to raise average selling prices declined 11 percentage points to 37 percent, the lowest level since April 2021. Despite this, 37 percent of firms rated inflation as their most important problem, a 3-percentage point increase and a new series record.
  • Nonfarm business productivity declined at a 4.6 percent annualized rate in 2022 Q2, the second consecutive quarterly decline, according to the BLS. On an annualized basis, real output declined 2.1 percent while hours worked were up 2.6 percent. Unit labor costs were up 10.8 percent annualized, a deceleration of 1.9 percentage points compared to Q1.
Forecast Impact:

For the first time since this inflation cycle started, CPI came in below our expectations. However, because last month’s inflation report came in hotter than expected after our forecast had been finalized, the cooler CPI and PPI readings this week will have a minimal net impact on our forecast. While we do not consider these reports to be clear evidence that inflation has peaked, we do think there are some encouraging signs. First, food prices continued to run hot in July, but many futures prices for agricultural commodities are down, signaling that future food price gains are likely to decelerate. Further, we expect gasoline prices to drag again in August as prices for energy commodities currently remain below their July averages. While energy is not explicitly measured in the more indicative core CPI, lower transportation costs should theoretically ease price gains for many goods. Finally, core producer prices were up a relatively modest 0.2 percent, producer prices for services rose only 0.1 percent, and the NFIB survey showed fewer firms raised prices in July or plan to raise prices, all of which may signal a gradual easing to broader inflationary pressures.

Still, cyclical inflationary pressures remain and will likely keep inflation readings elevated for some time. We expect shelter costs to continue to boost CPI readings for at least several more months. Further, a second consecutive negative productivity print suggests that labor costs will continue to push prices higher as well. While we think there may be some eventual revisions to the GDP and/or employment data (and thus a revision to productivity), it is also possible that the high rate of job switching, inflation, and lingering COVID related disruptions have decreased worker productivity in the short-term. On balance, we expect the Fed will continue its aggressive tightening stance until we receive several consecutive reports showing inflation is cooling.

Nathaniel Drake
Economic and Strategic Research Group
August 12, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.