July CPI: No Bad News Is Good News
The July CPI data were largely in line with expectations. Both headline and core CPI increased by 0.2% in July (0.15% and 0.17%, respectively), just a basis point or two off from our forecast going into the release. The details of the report contained a few surprises.
Core goods prices fell more than we expected, led by another large (-2.3%) decline in used vehicle prices.
Core services inflation was a bit hotter than anticipated, led by rebounds in inflation for housing, recreation and communication services.
The broad narrative of continued disinflation remains unchanged. Headline CPI fell below 3% year-over-year for the first time since March 2021. Core CPI declined to 3.2% year-over-year, the slowest pace since April 2021 and roughly half the 6.6% peak hit in September 2022. Furthermore, the annualized pace of core CPI inflation over the past six and three months has been 2.8% and 1.6%, respectively.
Today’s data leave the FOMC in a holding pattern and do not settle the 25 bps or 50 bps debate for September. As we go to print, markets view September as roughly a coin flip between the two outcomes. The continued steady slowdown in inflation, when paired with the rise in the unemployment rate and deterioration in other labor market indicators, leads us to believe the FOMC will want to move quickly towards a more neutral policy stance in the months ahead.
As a result, we expect a 50 bps rate cut at the September FOMC meeting, but the decision ultimately may be determined by the August employment report to be released on September 6 and the August CPI report to be released on September 11. Chair Powell’s expected speech at the Jackson Hole conference on August 23 looms large as the FOMC weighs the balance of risks to its dual mandate.
Source: U.S. Department of Labor and Wells Fargo Economics
(…) Unlike core goods, core services inflation sprang back in July (+0.3%) after increasing just 0.1% in June. The pickup was tied in part to somewhat firmer growth in primary shelter prices.
Rent of primary residences jumped 0.5% in July, which was stronger than the 0.4% average monthly gain in the first half of the year and looks unlikely to persist with the BLS’s more-forward looking measure of new tenant rents having slowed sharply in recent quarters. Owners’ equivalent rent also increased at a faster pace than June, but the 0.36% rise still points to slowing on trend when compared to the first half average increase of 0.43%.
Ex-housing, core services inflation picked up due to a smaller drop in the volatile travel category. The remaining portion of core services (i.e., ex-shelter and travel) rose 0.2% again in July as a drop in medical care prices was offset by rebounds in motor vehicle insurance, recreation and communication services. (…)
A bottoms-up approach to inflation forecasting suggests more housing and other services disinflation is on the way. From a top-down perspective, a weakening labor market and more price-conscious consumers also suggest a bit more disinflation is in the pipeline.
With both the CPI and PPI data in hand for July, we estimate both the headline and core PCE rose 0.13% last month. Core PCE inflation was just 0.12% in July 2023, so the 12-month change would remain at 2.6%, but if realized, this outcome would nonetheless highlight the resumption of progress in lowering inflation with the three-month annualized pace slipping back below 2% (1.8%). (…)
ING adds:
The chart below shows that we have had three consecutive readings below 0.17% MoM for core inflation and that the 3M annualised rate is now just 1.6%. The Fed has told us they won’t wait for the YoY rate to hit 2% (currently 3.2%) before cutting interest rates, because if they do that the risk is they have left rates too high for too long. This would mean a greater chance of an undershoot in late 2025 / early 2026. (…)
US core CPI metrics
Source: Macrobond, ING
The one area of real disappointment was housing with primary rents up 0.5% MoM and owners’ equivalent rent up 0.4%. Recent numbers had been tracking more in line with private surveys on housing costs, so the re-acceleration today is a surprise. The market has seemingly moved to reduce the pricing of a 50bp cut in September on the back of this. (…)
Housing costs MoM% re-accelerate
Source: Macrobond, ING
For now we favour a 50bp to start off as the Fed plays catch-up to the data before reverting to 25bp moves thereafter. However, the jobs report, published on 6 September is critical for this view. A soft payrolls and another move higher in the unemployment rate and then a 50bp move looks assured. A strong jobs number and perhaps a dip in the unemployment rate back to 4.2% and it will be a 25bp cut.
- Excluding shelter, the headline and core inflation rates were only 1.8% and 1.7% YoY in July as Ed Yardeni illustrates:
- “There is now a waiting game for the shelter CPI inflation rate to decline to the inflation rate in new tenant rent, as disinflation in new rents slowly but surely permeates the CPI calculation of rent. Shelter CPI inflation should soon soon decline from 5.1% y/y in July closer to 4.0% in coming months.”
Actually, Ed’s chart is not up-to-date as the BLS New Tenant Rent Index did turn negative YoY in Q2 (-1.1%). But the better series is the All Tenant Rent Index (black) which clocked at +4.0% in Q2, right where Zillow has been all year.
CPI-Rent is still at 5.1% YoY in July when it surprisingly rose 0.42% MoM following 3 months below 0.4% (avg. +0.29%), actually outpacing Zillow. This heavyweight series seems hard to contain.
Lastly on the CPI, goods deflation continues to help overall inflation but producer prices bounced back in July…
… along with import prices (yellow) and container rates (white).
And we might get higher tariffs this fall.
The next chart highlights one reason why deglobalization likely means higher secular inflation. Tariffs can sometimes be a tool used to protect under-utilized domestic production, but the US lacks enough productive capacity to meet demand so tariffs have directly contributed to higher prices. If deglobalization does indeed continue, then secular disinflation seems behind us. (RBA)
Mission not quite accomplished just yet!
China’s Economy Fails to Pick Up After Worst Stretch in Five Quarters Slow consumption and disappointing investment drag on growth.
A surprise slowdown in fixed-asset investment to 3.6% in the first seven months of the year was among the biggest takeaways from data released on Thursday. Retail sales beat expectations largely on a seasonal uptick — boosting China’s stock market — though they remained far below pre-pandemic growth. Industrial production softened slightly even as it continued to outpace consumption. The offshore yuan held onto early losses after the data. (…)
Other Details of Economic Data:
- Industrial output rose 5.1% in July from a year ago, down from June’s increase of 5.3%
- Retail sales increase 2.7% in July, rebounding from 2% in June
The housing slump showed little sign of reversing, even though the pace of its fall stabilized. Home prices dropped at a largely unchanged rate on a month-on-month basis but declined faster in annual terms. New home starts continued to plunge at a clip of around 20% from a year ago.
Overall investment expanded 1.9% in July from a year ago, worse than the 3.7% gain in the previous month, according to Goldman Sachs Group Inc. calculations.
A breakdown of the figures shows a deceleration in infrastructure investment expansion in the January-July period from the first six months of the year. Private firms’ investment also deteriorated and posted no change from a year ago. (…)
Equity markets reacted positively to the better retail sales growth rate, +2.7% vs +2.0% YoY. But Goldman Sachs estimates that seasonally adjusted sales declined another 0.8% MoM after –2.0% in June. Sinking more slowly but still sinking fast.
AI CORNER
Google just announced its Pixel 9.0 AI powered handset, beating Apple by a few weeks. Gemini Live will be available to all Android users. From the Google presentation:
The new Gemini assistant can go beyond understanding your words, to understanding your intent, so you can communicate more naturally. It can synthesize large amounts of information within seconds, and tackle complex tasks. It can draft messages for you, brainstorm with you, and give you ideas on how you can improve your work.
With your permission, it can offer unparalleled personalized help, accessing relevant information across your Gmail Inbox, your Google calendar, and more. And it can reason across personal information and Google’s world knowledge, to provide just the right help and insight you need, and its only possible through advances we made in Gemini models over the last six months.
It’s the biggest leap forward since we launched Google Assistant. Now we’re going to keep building responsibly, and pushing to make sure Gemini is available to everyone on every phone, and of course this starts with Android. (…)
Gemini can handle these kinds of complex personal queries within Google’s own secure cloud, without sending any of your personal data to a third-party AI provider you may not know or trust. And for some of the most sensitive use cases, like summarizing audio from a phone call, or suggesting a helpful reply to an encrypted text message, we’ve pioneered on-device generative AI with Gemini Nano. It’s the first time a large multimodal AI model has been optimized for a mobile device, so the data never leaves your phone.
With Gemini deeply integrated with Android, we’re well on our way to rebuilding the OS with AI at the core. The new Gemini assistant brings the benefits of AI to billions around the world, while helping to keep your personal information secure and private. Android is truly leading the way towards AI for everyone.
From my query to Perplexity.ai:
The new Google Pixel 9 series introduces several innovative AI features that enhance user experience across various tasks:
- Gemini Personal AI Assistant: Gemini replaces Google Assistant as the default voice assistant, offering a more sophisticated interaction experience. It integrates deeply with Google apps and Android, providing assistance with tasks such as checking schedules, finding details from emails, and more. Gemini Live, a conversational experience, allows users to have free-flowing conversations with the assistant.
- AI-Enhanced Photography and Video: The Pixel 9 series includes features like “Add Me,” which uses augmented reality to include the user in group photos, and “Magic Editor,” which allows users to reimagine photos using generative AI. The upgraded telephoto lens and Video Boost on the Pixel 9 Pro models enable high-quality zoom up to 20x.
- Pixel Studio: This new app allows users to create images using text prompts, leveraging an on-device diffusion model and a cloud-based text-to-image model. It’s designed for easy creativity and sharing.
- Pixel Screenshots: This feature helps organize and recall information from screenshots using AI. Users can search for screenshots through simple text prompts, making it easier to find saved information.
- Call Notes and Summaries: Call Notes saves a summary of phone conversations, while Call Summary provides detailed overviews of calls. These features ensure users can easily recall important details from their calls.
- AI-Powered Weather Reports: The Pixel Weather app uses AI to provide customized and accurate weather forecasts, allowing users to prioritize information like UV index or air quality
TechCrunch tested Gemini Live: “In my experience, these low latency, verbal features feel much more natural than texting with ChatGPT, or even talking with Siri or Alexa. I found that Gemini Live responded to questions in less than two seconds, and was able to pivot fairly quickly when interrupted. Gemini Live is not perfect, but it’s the best way to use your phone hands-free that I’ve seen yet.”
McKinsey discusses the enterprise world:
According to a recent McKinsey survey, 65 percent of organizations are now using gen AI, and many businesses are already seeing material benefits from it, write McKinsey’s Alex Singla, Alexander Sukharevsky, and coauthors.
[Gen AI] can serve as a creative assistant that can spark ideas for writing projects, art concepts, technical issues, and more. Need to draft text, code, or design something? Gen AI can provide examples to kickstart your projects.
If you’re stuck on understanding a concept or need information, it can explain, summarize, or point you to the right resources. In technical fields, it can even simulate scenarios, generate data, or help model complex systems.
New Andre Ng interview. David says “Ng stands out amongst commentators on AI. His scholarly knowledge of AI and computer science is supplemented by a long experience of applying AI in commercial applications.”