Economic Data Tracker – 
Cooling inflation trend continues

Trend watch

Millions of Texans are once again without power during a period of extreme weather in the aftermath of Hurricane Beryl, which was quickly downgraded to a tropical storm. While the outages are largely confined to southeaster Texas around Houston, the region is home to the ports of Houston, Corpus Christi, Galveston, Freeport, and Texas City. These ports were closed –  which is known as condition ‘Zulu’ by the U.S. Coast Guard – for at least two days due to Hurricane Beryl.

Several of those port stayed closed due to power loss, which has snarled local trucking and rail operations facilities. This will ripple through many of the activity-based indicators (slides 5 and 6) in the next few weeks. That said, most of the data – including the Back to Office, hotel occupancy, and rail traffic – are still cycling through the Independence Day holiday.

If you’re worried about consumers – fear not. Credit card data from the BofA Institute noted that household spending by U.S.-based consumers in European cities where the Taylor Swift Eras tour has been this summer are up 23% year over year. 

What’s new this week

• Consumer inflation slipped in June, continuing cooling trend (slide 7).
• Consumer inflation: Food and energy well behaved in recent months, but likely won’t last (slide 8).
• Key pieces of core inflation still cooling – shelter, medical services, vehicles (slide 9).
• Wholesale prices unexpectedly up in June, but not worrisome (slide 10).
• Monthly and annual pace of rents now running below pre-COVID trend (slide 11).
• Used car prices haven’t increased in 9 months, EVs down sharply from ’23 (slide 12).
• Consumer confidence slide to 8-month low, but inflation worries dimmed, too (slide 13).

Our take

We are encouraged by another month of data showing that inflation continues to cool, following the moderation in May. Understand that inflation is about the rate of change, not absolute price declines.

For instance, if a dozen large grade-A eggs in the U.S. cost $3.00 in May and $3.01 in June, the monthly change was 0.3%. Meanwhile, most people say, “hey, what do you mean inflation is coming down – eggs used to cost $1.50 in December 2019!”

We completely understand that sentiment. However, egg prices were jumping 15 cents a month in 2022 and parts of 2023. Thus, while the absolute price of eggs may still be rising, the pace is dramatically lower today. And the latter is what the Federal Reserve (Fed) has been trying to curb.

Additionally, last Friday’s jobs report provided an excellent industry-level view of employment. It showed that job growth was moderating, but not weak, while the unemployment is slowly nudging upward.

There was further confirmation from private data sources, including rental prices (on slide 11) and used car prices (on slide 12). In fact, the latter haven’t risen since September and have only increased twice in the past 15 months.

Nonetheless, based on Chair Jay Powell’s Congressional testimony this week, it sounds like the Fed needs another month or two of cooling inflation before proceeding with the first rate cut of this cycle. Thus, the path is widening for a sooner Fed rate cut, perhaps in September, if overall cooling trends continue.

To be clear: we don’t think the economy “needs” cuts to avoid a recession. The U.S. economy is cooling compared to 2023 but isn’t weak. That said, we believe that interest rates are restrictive for rate sensitive parts of the economy, especially lower-end consumers. While it sounds a bit counterintuitive, with housing supply being the stickiest part of inflation currently, a couple cuts get a 30-year fixed mortgage in the mid-6% range rather than the current low-7%. That would keep the economy humming for several more years without a whole lot of additional effort.

Bottom line

We maintain our view that the U.S. economy is cooling but not weak. That keeps the Fed in a holding pattern for the next couple months, awaiting more cooling by inflation data. Thus, we maintain our belief that progress on inflation should allow for at least one rate cut before the end of the year.