Producer price data and consumer sentiment data released Friday showed signs of more price stability, and this good news on the inflation front should keep the economy on track to grow in the third quarter.
The producer price index was up 0.3% in July after June’s downward revision, according to the Bureau of Labor Statistics. Meanwhile, inflation expectations inched down in August, per data released Friday from the University of Michigan’s consumer sentiment survey.
Together with Thursday’s data on the consumer price index, this indicates that the bar for another rate hike in September is getting higher. The single biggest concern remaining now for the Federal Reserve is elevated wage growth due to a tight labor market, which posted an upward surprise in July.
While there is room for wages to grow further, we do not expect wage costs will fuel another wave of inflation especially when the housing component accounted for 90% of the total increase in July’s inflation, according to the Bureau of Labor Statistics.
On the flip side, wage growth will likely become a tailwind for economic growth as the chance of a soft landing increases.
Inside the data
July producer prices came in above expectations at 0.3% on the month, yet June’s print was revised downwardly to unchanged from 0.1% growth earlier. On a year-ago basis, price gains received by producers for final demand stayed at 0.8%, below the long-term inflation target rate.
Core prices that exclude food and energy also rose 0.3% in July following a sharper downward revision from up 0.1% to down 0.1% in June.
Trade services—a proxy for wholesale and retail margins—rose 0.7% after falling 0.8% in June.
Consumer sentiment inched down to 71.2 in August from 71.6 on the heels of a small decline in future expectations, according to the UM survey. The changes are insignificant as the negative sentiment from rising energy prices is offset by solid household income and spending plans.
The subindex for spending expectations on major appliances reached the highest level since 2021, while consumer appetite for new vehicles also inched up near this year’s high.
The takeaway
Lower prices, higher income and optimistic sentiment will likely be the key tailwinds for the next two to three months. After all, we are inching closer to the finish line even though the job is not done yet.
