Consumer Price Index (CPI) Roars Again!
By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
The past couple of weeks saw a variety of reports offering mixed signals on the outlook for the economy. The last column talked about the tug of war among profits, growth and inflation and we saw this play out the past couple of weeks through stock market reactions.
The Consumer Price Index (CPI) report showed another acceleration in prices, and peak inflation was delayed yet again. Prices increased by 1.3% over the month, the largest in a year, and hit a 9.1% annual rate. Although the last report did show another uptick in price growth, we will likely begin to see some deceleration in prices the rest of the year. In other words, last month may have been the high point on the inflationary front. The core CPI, which strips out food and energy, declined to 5.9%. It peaked at 6.4% back in March. While still elevated, nationwide gasoline prices have declined by almost a dollar since the first week of June. We are also seeing declines in diesel, peaking in the first quarter of this year. This is an important development in the inflation picture because of the energy impact on the overall CPI. While the overall change in the CPI was 9.1%, gasoline increased a whopping 60% in one year. A year ago, used car prices had increased 45% over the year. In this last report, used car price increases slowed to 7.1%. While the headline inflation rate continued to climb, bond markets have begun to price in a deceleration in price growth. The implied rate of inflation with five-year TIPS (Treasury Inflation Protected Securities) declined from a peak of 3.56% in March down to 2.56% in July.
Despite the significant headwinds faced by the consumer, spending continues. The last retail sales report showed an increase for June of 1%, exceeding the consensus estimate of .9%. This was a signal for growth, and the Dow finished the day with a gain of over 600 points. Household finances are holding up even in the face of inflation. Delinquency rates on credit cards and consumer loans have ticked up slightly since June but remain well below levels that existed in early 2020, and not even close to rates observed in the Great Recession.
Higher interest rates are doing what the Fed intended, and signs of slowing in the economy are emerging. Both existing and new home sales have fallen to levels that are close to early 2020. Building permits have receded from higher levels of late 2021 and early 2022. Jobless claims have increased from a trough of 168,000 in early April of this year to 251,000. Industrial production has shown a slight decline in activity, but levels remain higher than pre-Covid activity. The last Markit PMI Composite measure showed a contraction in business activity.
There is a strong possibility that GDP growth will be negative for the 2nd quarter. This will make two consecutive quarters of negative GDP growth. The debate has already started about whether this means we are in a recession. The traditional definition of a recession is normally 2 consecutive quarters of negative GDP growth. However, much of what we have observed over the past two years has been anything but normal. Given the tight labor market and consumer spending that is quite resilient, I don’t expect the National Bureau of Economic Research to declare a recession over the first or second half of the year. As we’ve stated in prior columns, next year is more uncertain.