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Economic & Housing Weekly Note

Retail Sales, Industrial Production Soften as Core Inflation Comes in Hotter than Expected

September 16, 2022

Key Takeaways:

  • The Consumer Price Index (CPI) rose 0.1 percent in August after a flat month in July, according to the Bureau of Labor Statistics (BLS). On an annual basis, prices were up 8.3 percent, the slowest rate of increase since April. The headline gain was held back by a 10.6 percent pullback in gasoline prices. In contrast, while moderating slightly to the slowest pace since last December, food prices rose by a brisk 0.8 percent over the month. Excluding food and energy, core CPI rose 0.6 percent in August and was up 6.3 percent on an annual basis, accelerations of three-tenths and four-tenths from July, respectively. Driving the core inflation gain were shelter costs, which rose by a cycle-high 0.7 percent, medical care services, which were up 0.8 percent, and new vehicle prices, which also increased 0.8 percent.
  • The Producer Price Index (PPI) declined 0.1 percent in August following a 0.4 percent drop in July, according to the BLS. Annually, the PPI was up 8.7 percent, the lowest annual rate in a year. Final demand for energy fell 6.0 percent, while food prices were flat. Final demand for services rose 0.4 percent, the largest gain since May. Core PPI (less food, energy, and trade services) increased 0.2 percent over the month and was up 5.6 percent on an annual basis, the slowest rate since June 2021.
  • Retail sales and food services increased 0.3 percent in August, according to the Census Bureau. In addition, June’s spending data was revised upward but was largely offset by a downward revision to July’s data. The small headline gain was due primarily to a 2.8 percent jump in sales of motor vehicles and parts; when excluding such sales, retail spending was down 0.3 percent. Gas station sales declined 4.2 percent as gas prices declined further, while restaurant and bar sales rose 1.1 percent, rebounding from a 0.8 percent decline in July. Core retail sales, which exclude food services, autos, building supplies, and gas stations, were flat.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sector, declined 0.2 percent in August, according to the Federal Reserve Board. Manufacturing output ticked up one-tenth to 102.2, while utilities output fell 2.3 percent due to cooler-than-usual weather. Mining output was flat.
  • The National Federation of Independent Business (NFIB) Optimism Index increased 1.9 points to 91.8 in August, its second consecutive monthly gain. A net negative 42 percent of firms expect the economy to improve, a 10-point improvement from July. While still at a low level, this was the best reading since February. A net negative 19 percent of firms expect real sales to be higher, also a 10-point gain from last month. Twenty-five percent of firms plan to make capital outlays in the next 3 to 6 months and 4 percent plan to increase inventories, an increase of 3 points for both metrics. Fifty-three percent of firms are raising average selling prices, a decline of 3 percentage points and the lowest level since October 2021, while an even lower 32 percent of firms plan to raise prices in the future, a 5-percentage point drop and the lowest level since January 2021. The share of firms reporting quality of labor as the “single most important problem” jumped 5 percentage points to 26 percent, the highest level since November 2021.
Forecast Impact:

Headline CPI was in line with our expectations, but core inflation came in much hotter than expected. Despite signs that some supply chain issues are easing and reports that retailers are flush with excess inventory, commodities less food and energy still rose at a robust 0.5 percent pace. Further, shelter costs rose at their fastest monthly pace this cycle and, given the lagged nature of the shelter data collection method, will likely continue to contribute significantly to underlying inflationary pressures well into 2023. Additionally, services less shelter increased 0.6 percent, suggesting wage pressures remain high amid a tight labor market. We are likely to revise upward our near-term forecast for core inflation based on this report.

Still, both the PPI, which declined for a second consecutive month, and the NFIB survey, which showed far fewer businesses planning to increase prices, suggest that some supply-side easing of inflationary pressures may feed through to consumers in coming months. These reports are generally more in line with our ongoing view that inflation is slowing gradually and will likely decelerate further as economic growth continues to weaken and goods price inflation in particular starts to soften.

Revisions to retail sales suggest that Q2 personal consumption was likely a bit stronger than we had previously thought, but also that Q3 growth is likely lower. The weakness in core retail sales suggests that consumers are not yet using their extra disposable income from lower gas prices to fund purchases elsewhere, though restaurant sales did return to their trend of outperforming larger retail sales growth. Industrial production, an important recession indicator, was also weak in August and suggests COVID lockdowns in China and the energy crisis in Europe are likely beginning to weigh on U.S. manufacturing. On balance, we believe these reports are consistent with our view that the economy is largely stagnating and will tip into a recession early next year.

Nathaniel Drake
Economic and Strategic Research Group
September 16, 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.