Inflation Measures Remain Cool for Second Consecutive Month

Key Takeaways:

• The Consumer Price Index (CPI) rose 0.2 percent in June for the second consecutive month, according to the Bureau of Labor Statistics (BLS). The year-over-year rate increased two-tenths to 3.2 percent as the flat July 2022 monthly reading was replaced with the modest 0.2 percent monthly gain in July 2023. Core CPI, which removes food and energy, also increased 0.2 percent over the month, the same as in June, and 4.7 percent over the year, a deceleration of one-tenth. Shelter prices continued to be a large contributor to inflation, rising 0.4 percent over the month and 7.7 percent compared to a year ago. Core goods prices fell 0.3 percent as used cars and truck prices declined 1.3 percent and apparel prices were flat. Airline fares dropped 8.1 percent, the fourth consecutive monthly decline, while motor vehicle insurance rose at a brisk 2.0 percent rate over the month and 17.8 percent over the year, marking one of the few categories to still be accelerating.
• The Producer Price Index (PPI) increased 0.3 percent in July but was revised downward for June, according to the BLS. Over the year, the PPI rose 0.8 percent, an acceleration of six-tenths compared to June. Core PPI increased 0.2 percent compared to June 2023 and 2.7 percent compared to July 2022.
• Consumer (non-mortgage) credit outstanding increased by $17.8 billion in June, according to the Federal Reserve Board. Revolving credit (largely credit cards) declined by $600 million while nonrevolving credit (largely student and auto loans) jumped by $18.5 billion.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index rose nine-tenths to 91.9 in July, its highest level since November 2022. Compared to June, more firms plan to increase employment, make capital outlays, and increase inventories. On net, negative 30 percent of firms expect the economy will improve, the second consecutive 10 percentage point improvement in that measure. A net 25 percent of firms reported raising average selling prices, a decline of 4 percentage points and the lowest level since February 2021. Still, small businesses continued to report a tight labor market, with 56 percent of firms reporting there were few or no qualified applicants for job openings and a net 38 percent of firms raising average worker compensation, increases of 2 percentage points for each measure compared to June.
• The real goods U.S. trade deficit narrowed by $2.7 billion to $86.2 billion in June, according to the Census Bureau. Real exports grew by 0.5 percent while real imports were down 0.9 percent.

Forecast Impact:

Inflation measures were cool for the second consecutive month in July, largely in line with our expectations. While the headline CPI year-over-year rate increased compared to last month, this was due entirely to base effects: Inflation on a monthly basis was flat in July 2022, so any monthly increase in July 2023 would cause the annual rate to rise. However, on an annualized basis (what inflation would be if it rose at the same monthly rate for an entire year), both headline and core CPI have been right around the Fed’s 2 percent target for each of the past two months. Given that shelter price gains, which are currently the largest contributor to inflation, are set to continue to ease as they catch up with timelier market-based measures of home prices and rents, we expect inflation to continue to generally decelerate in coming months. Admittedly, though, there are still risks of reinflation down the line from rising oil and gas prices and elevated wage growth relative to productivity gains. This risk is especially true if the economy is able to avoid a recession in the coming quarters. Therefore, we continue to expect monetary policy to remain restrictive, and we believe the odds of future rate hikes to be minimal.

Small business optimism has improved, due in part to easing inflation and some reacceleration in consumption. Still, the NFIB survey remains well below its pre-pandemic levels and consumer credit growth has slowed in recent months, pointing to a possible slowdown in consumption. Additionally, declining imports may indicate weaker consumer demand and business investment in the near-term. As such, we continue to forecast that growth will slow in coming quarters.

Nathaniel Drake
Economic and Strategic Research Group
August 11, 2023

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