Exploring Economic Indicators: July 2024 Inflation

Inflation has been at the forefront of everyone’s minds these last few years, from policymakers and businesses to advisors and everyday consumers. Besides labor market data, it has the biggest influence on the Fed’s interest rate policy and financial markets. The Fed has been patient in making any changes to monetary policy, keeping the Fed Funds rate between 5.25-5.50% since last summer. However, it is all but certain that the Fed is targeting their first rate cut to happen at their meeting next month.

This article looks to summarize three important economic indicators from the past week to provide insight into the latest trends in inflation, consumer spending, and consumer sentiment, which have been heavily influenced by inflation over the past couple of years.

Inflation continued to cool last month, falling to its lowest level since March 2021. The Consumer Price Index (CPI) rose 2.9% in July, down from 3.0% in June and below the expected 3.0% rise. Compared to the previous month, consumer prices were up 0.1%, as expected. The primary driver for July’s growth was the continued rise in shelter costs, which accounted for nearly 90% of the headline increase.

Core inflation, which excludes food and energy prices, cooled to its lowest level since April 2021. The core CPI fell to 3.2% on an annual basis and rose 0.2% from the previous month. Both readings were consistent with their respective forecasts.

The debate has shifted from when the Fed will begin to cut rates to how big of a cut we can expect at the next meeting. After the latest CPI numbers were released, the CMEFedWatch Tool showed a 62.5% probability of a 25-basis point cut and a 37.5% probability of a 50-basis point cut. Also worth mentioning, the market is now forecasting the Fed Funds Rate to drop 1.0% by the end of the year. The Fed has said multiple times that they are relying heavily on data, specifically employment and inflation numbers. Thus, we can expect each of these future reports to continue to play a big role in monetary policy.

American consumer spending jumped last month, exceeding expectations by more than double. Retail sales were up 1.0% in July, higher than the anticipated 0.4% growth in consumer spending. Consumer spending rose significantly at motor vehicle dealers (3.6%), electronic & appliance stores (1.6%), building material stores (0.9%), and food & beverage stores (0.9%).

Core retail sales (excluding automobiles) were up 0.4% from June, exceeding the expected 0.1% growth. Lastly, control purchases, which is thought to be an even more “core” view of retail sales, were up 0.3% from June. While this series typically does not garner as much attention as the headline and core figures, control purchases are a more consistent and reliable reading of the economy because it strips out many volatile components.

Overall, the data provided a sigh of relief and makes a soft-landing scenario more realistic. The latest retail sales data showcases the strength of the U.S. consumer in the face of a slowing labor market, elevated interest rates, and still some-what high inflation.

Retail sales will have an impact on the interest in the SPDR S&P Retail ETF XR, VanEck Retail ETF (RTH A-), Amplify Online Retail ETF (IBUY C+), and ProShares Online Retail ETF (ONLN B).

Consumer attitudes were essentially unchanged this according to the preliminary report for the Michigan Consumer Sentiment Index. The August preliminary report came in at 67.8, marking a 2.1% increase from July’s final reading. The latest reading was above the forecasted value of 66.7. Over the past four months, consumer attitudes have been relatively stable with the index staying within a narrow 2.7-point range.

The Michigan Consumer Sentiment Index is a monthly survey measuring consumers’ opinions with regards to the economy, personal finances, business conditions, and buying conditions. In the latest report, consumers’ survey responses were heavily influenced by the upcoming presidential election and how they think it will play out.

Consumer attitudes are closely monitored because they help policymakers, businesses, and investors gauge future economic conditions, as confidence levels tend to impact spending behavior. Since consumer spending accounts for approximately 70% of the economy, the spending habits of U.S. consumers have a major impact on economic growth.

The Consumer Discretionary Select Sector SPDR ETF (XLY A) is tied to consumer sentiment.

This week we will receive data on a few more housing indicators. On Thursday, the National Association of Realtors will release July’s data on existing home sales followed by the Census Bureau’s release of new home sales data on Friday. These housing market indicators will have an impact on homebuilders and residential real-estate ETFs such as iShares U.S. Home Construction ETF (ITB A), SPDR S&P Homebuilders ETF (XHB A+), and iShares Residential and Multisector Real Estate ETF (REZ A-). Existing home sales are projected to remain at a seasonally adjusted annual rate of 3.89 million units. New home sales are expected to rise to a seasonally adjusted annual rate of 630K units.

Also, this week, we will receive the latest data on the Conference Board’s Leading Economic Index. The index is expected to decrease 0.3% from June, marking the 5th consecutive monthly decline.