The last two days have felt like the economic equivalent of the NBA Draft or the Oscars. Analysts and commentators alike have been trying to anticipate the latest inflation reports from the Bureau of Labor Statistics in hopes that it might give them some insight into the near term movements in the stock market as well as the Federal Reserve’s decision about interest rates in September. For better or for worse, the Producer Price Index (PPI) update on Tuesday and the Consumer Price Index (CPI) update on Wednesday both came out very closely aligned with expectations so there has been little drama to discuss in the aftermath.
The PPI is typically seen as a measure of inflation from the producers and wholesalers point of view. The most recent report demonstrated that producer prices rose 0.1% in July which is better than the 0.2% that was reported for June. The 12 month inflation rate from last year until now was also lower, registering at 2.2% in July compared to 2.7% in June.
This is a good sign that prices are stabilizing, but these values are still higher than they were at the end of 2023 so there is more work to be done. The index for services such as food retail, automotive retail, and physician care actually fell 0.2% in July while the index for goods increased 0.6% so unfortunately there is still inflationary pressure in the sale of goods such as gasoline and food products like meat, and fresh fruits. The trend looks like we’re winning the war, but there are still battles to be fought.
The CPI is typically seen as a measure of inflation from the consumer’s perspective so you can get both sides of the market when we look at them both together. The CPI for July reported a 0.2% seasonally adjusted increase in prices since June and an unadjusted rate of 2.9% since July 2023. Seasonal adjustment is just a tool used by statisticians to smooth out some of fluctuations that happen every year around the same time of year.
This 2.9% increase in consumer prices is the lowest level of inflation reported since March 2021 and shows continued improvement in the fight against inflation compared to the 3.3% rate in May and the 3.0% rate in June. Although this is excellent news for the country and more evidence to support the argument that the Federal Reserve can start to reduce their restrictive interest rates, it’s far from perfect. The price index for shelter which captures rents and home prices increased by 0.4% in July and accounted for nearly 90% of the monthly increase. At the end of the day, prices are still more than 20% higher than they were before the pandemic.
Inflation is tough to stop and it never stops quickly, but it does seem that we are inching closer to the target of 2% that most economists consider to be reasonable and healthy for an economy as large as ours. A helpful analogy for the fight against inflation is to think of a flood. The flood comes on quickly and causes a lot of damage, but the clean-up can’t really take place until the waters have stopped rising and started to go back down. We’re watching our inflation waters go back down, but we are just starting to deal with the long term effects on people and households.
