Inflation is real
Consumer prices were 5.4% higher in June compared to the same time last year, which is the largest CPI print we’ve seen since the summer of 2008. Core CPI, which excludes food and energy, increased 4.5%, which is the largest print since September 1991 (that’s literally before I was born, it’s baby’s first high-inflationary period!). Prices are rising for consumers because they’re higher for producers. June’s PPI print came in at a whopping 7.3%, which is the highest annual increase on record for the index.
Moral of the story: Expectations were for inflation to come in hot this month, but reality was quite a bit more aggressive. The longer inflation persists, the stickier it gets, which means conversations have started shifting from this being a temporary and transitory phenomenon to this being something a little more persistent. All eyes are on the Fed’s reaction as this level of inflation would point to pressure for the Fed to start easing their accommodative policies. Investors are starting to get a bit worried and we saw stocks pull back on these inflation reports.
It might get worse
Retail sales increased 0.6% in June, compared to expectations for retail sales to actually fall 0.4% for the month. On an annual basis, retail sales were up 18% versus June last year and are now well above pre-COVID levels. Consumers continue to shift their purchases toward services like eating out and traveling.
Moral of the story: Consumer spending, which accounts for two-thirds of US economic growth, is expected to increase at a double-digit rate for the second quarter. Household savings by $2.5T during the pandemic, and consumers are ready to spend that money. Plus, households are going to start receiving child tax credits, adding another boost to spending capacity. More spending is good for economic growth but also indicates continued elevated demand, which means more inflation. So basically, I’m not sure if this strong retail sales report was good news or bad news…
Before it gets better
The Empire State Manufacturing Survey, which is conducted by the NY Fed, increased to a record 43 for July. Anything above 0 indicates an expansionary environment, so manufacturing and hiring are booming in the region. Meanwhile, a similar survey from the Philadelphia Fed, though still well in expansionary territory, fell from 30.7 last month to 21.9 for June as the region continued to have difficulties finding enough labor and inputs to meet demand.
Moral of the story: Interestingly, both surveys indicated a decline in prices paid for inputs, which could be a nice forward indicator of inflation pressures coming off. If you remember, manufacturers were feeling the pressure of increased prices in the spring well before it hit consumers. Regardless, the big takeaway here is that the economy is continuing to grow, which is good given the inflation we’re seeing because inflation with no underlying economic growth (aka stagflation) is a bad scenario.