Retail Sales Increase While Supply Chain Disruptions Continue to Put Upward Pressure on Inflation Measures
- Retail sales and food services rose 0.6 percent in June, according to the Census Bureau, while May sales were revised downward from a 1.3 percent decline to a 1.7 percent decline. Sales of motor vehicles and parts fell 2.0 percent. When excluding motor vehicles and parts, sales rose 1.3 percent in June. Core retail sales (excluding food services, autos, building supplies, and gas stations) rose 1.1 percent, driven by gains in general merchandise and nonstore retailers.
- Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.4 percent in June to 100.1, according to the Federal Reserve Board. Mining and utilities output rose 1.4 and 2.7 percent, respectively, while manufacturing declined 0.1 percent from May. Although industrial production has risen for the past five months, the index remains 1.2 percent below February 2020 levels.
- The Consumer Price Index (CPI) grew 0.9 percent in June and 5.4 percent on an annual basis, the fastest rates since 2008 for both metrics. Core CPI also increased 0.9 percent, driven largely by a 10.5 percent gain in used car and truck prices, the largest increase on record, and a 2.0 percent jump in new vehicle prices. From a year ago, core CPI rose 4.5 percent, the fastest annual pace of growth since 1991. The pace of owners’ equivalent rent (OER) is creeping up as well, increasing at an annualized rate of 4.2 percent, the fastest annualized pace since November 2018. The Producer Price Index (PPI) for final demand of goods and services rose 1.0 percent in June. On an annual basis, headline and core PPI gains accelerated to 7.3 percent and 5.5 percent, respectively, record highs for both. Import prices rose 1.0 percent in June and 11.2 percent from a year ago. The Bureau of Labor Statistics produces all three of these reports.
- The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 2.9 points to 102.5 in June, the highest level since September 2020. A whopping 28 percent of firms plan to increase employment, the greatest share of respondents on record, with 46 percent stating that they have open positions that they are not able to fill right now. Similarly, the share of firms raising worker compensation rose 5 percentage points to 39 percent, a record high.
Retail sales and food services increased in June as growth in other categories outweighed the decline in motor vehicles, a sector continuing to be plagued by semiconductor shortages. While a downward revision to May sales offsets some of the June gain, overall, the report was in line with our Q2 personal consumption forecast.
Inflation measures continued to climb in June. The eye-popping 0.9 percent CPI growth in June was somewhat higher than we had expected, but it is tempered by the fact that likely temporary factors related to new/used auto prices accounted for nearly half of the gain, hence a related 6.6 percent decline in June production of motor vehicles and parts. The increase in prices for producers broadly will likely continue until supply disruptions pass. However, once resolved, many of the current drivers of inflation, such as the automotive sector, will likely see sharp deceleration if not outright price declines. A similar dynamic may occur in other industries experiencing a surge in consumer demand, such as airlines. Therefore, we continue to believe that the current acceleration in inflation is mostly, though not entirely, transitory. The stronger-than-expected CPI print will lead to a bump upward in our near-term annual inflation forecast, but we anticipate minimal impact to our current year-end inflation forecast.
Over the longer run, the increase in OER in the June CPI report supports our expectation that growth in housing costs will increasingly take the place of some of the fading transitory inflation drivers. This is a key driver of our above-consensus outlook for overall inflation over the next couple of years. Furthermore, we believe wage growth will continue to put longer-term pressure on inflation, as the NFIB survey showed a significant share of firms with jobs they are unable to fill, leading to a record share of firms raising worker compensation. The highest share of firms since 1981 also reported raising their prices in June. The possibility of a wage-price spiral developing is a risk moving forward. However, we continue to believe that labor market tightness will ease as school re-openings, waning COVID concerns, and the expiration of extended unemployment benefits occur, leading to people currently unable or unwilling to re-enter the workforce to do so.
Ricky Goyette, Ryan Gavin, and Nathaniel Drake
Economic and Strategic Research Group
July 16, 2021
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