July Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA: CPI: +0.5%; Over-Year: +5.4%; Ex-Food and Energy: +0.3%; Over-Year: +4.3%/ Real Hourly Earnings: -0.1%; Over-Year: -1.2%/ HWOL: +3.8%

IN A NUTSHELL: “It’s hard to get excited about a deceleration in inflation which goes from scorching hot to extremely hot.”

WHAT IT MEANS: Inflation surged again in July, but the increases were a little bit more concentrated in the volatile food and energy sectors during the month. Excluding those components, household costs were up solidly, but not ridiculously. The monthly rise was also the lowest since February, which I guess you can say is progress. I will not say that, since the over-the-year pace is still way too high. In July, the big increases were in almost all components of food and energy, as well as in new vehicles. Interestingly, services costs, including housing and medical services, rose more moderately. Used vehicle price increases also eased, though they are up 42% over the year.

With inflation so high, it should not be a surprise that it is cutting into household spending power. While hourly wages were up in July, when adjusted for inflation, they were down slightly. Over the year, consumer purchasing power is off solidly and that is not good news, especially with some of the government’s support programs about to disappear.

The strength of the labor market is clear and the surge in the number of jobs being advertised online only confirms that point. The Conference Board’s Help Wanted OnLine index keeps setting new records, as firms both reopen fully and expand. Companies are also using every means possible to find new employees as the number of unfilled positions also it at record highs.

IMPLICATIONS: I like to say that the answer to all economic questions is “It depends!” and that is the case with the current state of inflation. Consumer prices surged in July, but the rise was less than what we saw in the previous four months. So, does that mean inflation is fading? Well, it depends. If all you worried about was the period from March through June, then the answer is yes. If you look at it in an absolute sense, that is, was the rise in July high, the answer is no. So, pick you poison. My view is this: The last thing we want to see is additional months of price gains that are above 0.2%. To get back to the Fed’s average target of 2%, you need a monthly rise of less than 0.2%, so we are nowhere that happening, at least not yet. Actually, it would be nice to see that number once. Until that happens, I will not be exuberant about any “deceleration” in the monthly consumer cost numbers. In addition, the massive number of job openings points to further gains in wages, which should keep the pressure on prices. That said, these reports will not do anything to the Fed’s wait and see approach. The members are not so foolish as to think an annualized pace of 5.8%, which is what we would get if the July gain was repeated over the next year, is anything to be happy about. But they need more time to allow the wild swings that were created in 2020 because of the pandemic to be smoothed out. As long as the Fed holds off on warning that it is nearing the point that tapering will begin and subsequently rates will be increased, investors will likely remain optimistic.