Inflation Update – July 10, 2023


Author: Joe Maas, CIO, SPG Advisors, LLC

Published July 10, 2023

July Inflation Update

Summary: In another month of disinflation, CPI, PPI, and PCE all made downward moves, as the Federal Reserve decided against another rate hike at their June FOMC meeting. Although data is slowly but surely moving in the right direction, the fight against inflation remains.

Comparing Measures of Inflation

Consumer Price Index (CPI)

As the most commonly quoted inflation metric, the consumer price index, or CPI, tracks costs to consumers in urban settings. These costs are based on goods and services weighted by how consumers respond to consumer expenditure surveys.

Producer Price Index (PPI)

A less common metric of inflation, the producer price index is helpful in understanding how costs to producers change and in what categories. PPI is sometimes thought of as a leading indicator of inflation, as costs often get passed down to consumers later on in the forms of CPI and PCE.

Personal Consumption Expenditure (PCE)

Released a few weeks after CPI and PPI, the personal consumption expenditure index tracks costs to consumers in rural and urban areas. This index is based on and weighted by data provided from businesses on what they actually sold to consumers and is favored by the Federal Reserve when considering monetary policy.

Current State of Inflation:

CPI

May CPI data came in cooler than expected at an annualized rate of 4.0%, while Core CPI came in at 5.3%, both are down from April’s headline CPI of 4.9% and Core CPI of 5.5%. Month over month, May CPI was only +0.1%, while Core CPI was similarly much hotter at +0.4%. Although this marks a dramatic downward move for annualized headline inflation, 4% remains twice as high as the Federal Reserve’s target rate.

What drove inflation in this May CPI data, is equally as important as the inflation rate itself. Leading CPI higher was used vehicles (+4.4% MoM), transportation services (+0.8% MoM), shelter (+0.6% MoM), medical care commodities (+0.6% MoM), and food away from home (+0.5% MoM). On the other hand, energy (-3.6% MoM), new vehicles (-0.1% MoM), and medical services (-0.1% MoM) supported CPI’s downward move.

Many of these items still facing high inflation are consumer essentials, such as rent, transportation, or medical commodities, and are still putting pressure on the average consumer as we mark the 26th consecutive month that headline CPI has posted above 2%.

PPI

May’s Producer Price Index cooled to a headline PPI of +1.1% and Core PPI of +2.8% from one year ago. On a monthly basis, this amounted to a -0.3% contraction in headline PPI and a 0.0% change in Core PPI. This data demonstrates quite good news in the fight against inflation, being that oftentimes producers must pass on their inflationary pressures to preserve margins.

The largest factors in May’s PPI report were trade (+1.0% MoM), energy (-6.8% MoM), transportation & warehousing (-1.4% MoM), and foods (-1.3% MoM). PPI will hopefully continue to be a strong indicator of future inflation, moving at or slightly under the Fed’s 2% goal.

PCE

The most current Personal Consumption Expenditure inflation in May cooled to a headline PCE rate of 3.8% and a Core PCE rate of 4.6%, as April’s headline PCE was also revised down from 4.4% to 4.3%. On a monthly basis, headline PCE was flat and Core PCE rose a slight +0.3% from April, down from last month’s +0.4% month over month increase.

PCE inflation will continue to be one of the most important inflationary measures as it is the key rate the Federal Reserve monitors for its 2% target.

With one or two more 25 basis point rate hikes on the horizon, inflation should continue to slow, as monetary policy and a slowing economy make their mark. We are hopeful that inflation will indeed reach its 2% target, in the next year, but will tactically monitor and respond appropriately in the meantime.

As usual, Sound Planning Group & the Synergy team remains vigilant in monitoring the latest economic data to effectively oversee and optimize our portfolios in accordance with our mandates.

Thank you for your trust.

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