Inflation Data Continues to Cool as Small Businesses Report Lower Sales Outlooks

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.2 percent over the month in August and 2.5 percent compared to a year ago, a new cycle low and a rate of annual inflation that is roughly in line with pre-pandemic readings, according to the Bureau of Labor Statistics (BLS). Food prices increased a muted 0.1 percent, and energy prices were down 0.8 percent. Core CPI rose a somewhat-stronger 0.3 percent over the month, leaving the annual rate of inflation unchanged at 3.2 percent. However, the strength in core inflation was due largely to lagged shelter prices, which increased 0.5 percent over the month. Core goods prices declined 0.2 percent, their third consecutive monthly decline. Prices for medical care services also declined, while airline fare jumped 3.9 percent.
• The Producer Price Index (PPI) rose 0.2 percent in August following a small downward revision to July’s data, according to the BLS. Compared to a year ago, the PPI rose 1.7 percent. Core PPI (excluding food, energy, and trade services) rose 0.3 percent in August and increased 3.3 percent compared to a year prior. The components of PPI that feed into the PCE price index were generally muted.
• Consumer (non-mortgage) credit outstanding increased by $25.4 billion in July following several months of below-average growth, according to the Federal Reserve Board. Revolving credit outstanding (largely credit cards) increased by $10.6 billion after an outright decline in June, while nonrevolving credit outstanding (largely student and auto loans) increased by $14.8 billion.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 2.7 points to 99.9, ending a streak of four consecutive monthly improvements. On net, negative 13 percent of firms expect the economy to improve, a downgrade of 6 percentage points. Negative 18 percent of firms expect real sales to be higher in the next six months on net, a downgrade of 9 percentage points. A net 13 percent of firms plan to increase employment, down 2 percentage points from last month. At 24 percent, a plurality of firms continues to rate inflation as their single most important problem, followed closely by quality of labor at 21 percent.

Forecast Impact:

Inflation data came in largely in line with our forecast. Cooling price gains were evident through most major categories, with the notable exception of shelter. Admittedly, shelter inflation hasn’t slowed as much or as swiftly as we have expected up to this point, though more timely market measures continue to suggest that shelter inflation will slow over time. Regardless, the Fed’s preferred PCE measure of inflation puts a much smaller weight on shelter, so we don’t believe this reading will meaningfully impact the course of monetary policy.

The large increase in credit outstanding suggests that consumers may have turned to credit card usage to fuel a large increase in July spending that was not supported by rising incomes. Still, credit balances as a ratio of disposable income remain within historical norms. We continue to believe consumption will slow in line with muted income growth, though, a view that was supported by the NFIB respondents reporting lower sales outlooks than before.

Nathaniel Drake
Economic and Strategic Research Group
September 13, 2024

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