By Gregory Heym, BHS Chief Economist and and host of Crossing The Line
This week, we were paid a visit by the PI brothers, who seem to be at odds with each other. Welcome to the "Battle of Inflation Indicators" edition of The Line.
Consumer Prices Up Less than Expected in July
The CPI data came out Tuesday and gave us good news on inflation. Consumer prices were up 0.2% last month, and 2.7% from a year ago. The annual increase was slightly lower than forecasts.
“Core” inflation—which removes food and energy prices—rose 0.3% in July and was 3.1% above last year’s level. While those numbers sound a bit concerning, they were in line with forecasts.
Here’s what you else you need to know about this report:
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Housing is still the biggest contributor to the monthly increase in inflation. As we’ve mentioned before, the way the BLS calculates housing prices, it can take six months or more for any price declines to show up in the data.
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The high annual increases in both the headline and core inflation numbers are due in part to weak inflation data a year ago.
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While tariffs have led to price increases for some goods, they have yet to cause widespread inflation. For example, prices for household furnishings and supplies jumped 0.7% in July, but apparel prices rose just 0.1%.
The bottom line is that it’s services that are leading consumer price increases, not goods. Tariffs have certainly made some items more expensive, but there’s still no evidence of them causing widespread inflation.
Producer Prices Up More More than Expected Last Month
The producer price index surged 0.9% last month, way above the 0.2% Dow Jones forecast. Over the past year the PPI is up 3.3%, well above the Fed’s 2% inflation target.
While the PPI doesn’t get the attention the CPI does, this month was an exception. That said, it is just one month of data, so I wouldn’t hit the panic button yet.
The concern here is that if prices are rising at the producer level, those increases will eventually be paid for by consumers. That’s typically true, but like consumer prices, the largest increases in producer prices were in services, not goods. This provides more evidence that tariffs have yet to produce broad-based price increases at either the producer or consumer level.
Will the Fed Still Cut in September?
According to the CME Group’s FedWatch tool, yes. It has the probability of a 25-basis point cut in September at over 90%. At the end of this month, we’ll get the personal consumption expenditures data, which includes the Fed’s preferred measure of inflation. That report will give the Fed the most accurate data on consumer spending and inflation, and combined with the August jobs report, will determine their next move.
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