It’s a very important week for US data as the last major reports arrive ahead of the Federal Reserve’s September FOMC meeting. Inflation of consumer and producer prices, retail sales and industrial production are pending, and the general theme will likely be higher inflation than recently in the face of weaker activity relative to recent trends. However, Fed officials appear to be of the mindset that they will likely pause interest rate increases again and reassess rates in November, with only 2 basis points of policy tightening planned for later this month.
As for inflation, we expect fairly large jumps in August monthly readings with upside risk relative to consensus predictions. Higher gas prices will be the main bullish factor, but we also see the threat of a spike in airfare and healthcare costs, as well as higher insurance prices. These factors are also likely to contribute to the core CPI reaching 0.3% MoM instead of the 0.2% we have seen in the previous two months. The slowdown in home rentals will be evident, but it may not be enough to offset as much as the market expects. However, the year-on-year rate of core inflation will slow to perhaps 4.4%. We are hopeful that we can get down to 4% year-over-year in the September report and not far from the 3.5% in October. We would characterize these relatively firm month-over-month inflation figures as a temporary blip in what is likely to be an intensifying disinflationary trend.
In fact, it was interesting to see that the Federal Reserve’s Beige Book characterized the recent strength in consumer spending as being driven by tourism spending, which had been “increasing.” But the general feeling was that this would be “the last leg of the pent-up demand for pandemic-era leisure travel.” Additionally, other expenses were more moderate, “especially on non-essential items.” This may well appear in the retail sales report. We already know that auto volume sales also fell sharply, but remember that this is a value number and higher prices, particularly for gasoline, will help keep overall retail sales in positive territory. But with savings rapidly depleting and credit card delinquencies rising, there are concerns that weaker numbers will follow, especially with student loan payments restarting, adding to financial strains across the country. household sector.
For completeness of reporting, we expect industrial production to be much weaker than the 1% jump seen last month. Manufacturing surveys continue to point to a contraction, and weakness in the component could offset some firmness in utilities and mining and drilling activities.