Experts: Inflation Will Be Hot Topic at Fed Committee Meeting

U.S. economic data this week was consistent with very strong real GDP growth in the second quarter. We are also seeing strong price inflation. Inflation will be a key topic of discussion at the Federal Open Market Committee meeting over July 27/28, as will the Fed’s intentions for the start of winding down asset purchases. 

Retail sales found some traction in June, increasing by 0.6 percent, after falling by 1.7 percent in May. A big factor in recently soft retail sales is auto sales, which are strangled by lack of inventory. The dollar value of retail auto sales fell by 2.0 percent in June as unit sales of new cars dipped to a 15.4 million unit annual rate. However, retail sales ex-autos gained a strong 1.3 percent in June, boosted by higher gasoline prices. Most other broad categories also improved, including electronics and appliances, clothing and general merchandise. For the year ending in June, total nominal retail sales were up by 18.0 percent. The June retail sales numbers will solidify expectations for strong consumer spending data in the Q2 GDP report, due out in 2 weeks.

The Consumer Price Index increased by 0.9 percent in June, its largest monthly increase since June 2008. Over the 12 months ending this June, the CPI has increased by 5.4 percent. Most broad categories showed significant price gains in June. Excluding food and energy, core CPI was up 0.9 percent, its third consecutive strong monthly gain. For the 12 months ending in June, core CPI was up 4.5 percent. 

The Producer Price Index for Final Demand increased by 1.0 percent in June, pushed by energy prices, but other major segments were up as well. For the year ending in June, headline PPI was up by a very strong 7.3 percent. The core PPI (less food, energy and trade) was up by 0.5 percent and showed a 5.5 percent increase over the previous 12 months. 

The U.S. Import Price Index increased by 1.0 percent in June and was up 11.2 percent over the previous 12 months. Prices went up despite a firming value of the dollar through June. Fuel imports were a big factor, up 4.7 percent for the month. Nonfuel import prices increased by 0.7 percent in June, after a 0.9 percent gain in May. 

The National Federation of Independent Business’s Small Business Optimism Index increased noticeably in June, up to 102.5. This is still well below the recent peak of 108.1 from August 2018, but it maintains the up-trend through the first half of this year. 

U.S. industrial production increased by a moderate 0.4 percent in June as manufacturing output was held back by global supply chain issues. Manufacturing output eased by 0.1 percent. Mining was up by 1.4 percent and utility output gained 2.7 percent with the heatwave in the West. Motor vehicle assemblies fell back to a 8.91 million unit rate in June after increasing to a 9.75 million unit rate in May. 

Initial claims for unemployment insurance fell by 26,000 for the week ending July 10 to 360,000. Continuing claims fell by 126,000 for the week ending July 3, hitting 3,241,000. The total number of claims for all unemployment benefit programs fell by 372,279 for the week ending June 26 to reach 13,836,598, less than half the level from the same week in 2020.

Mortgage applications for purchase jumped by 8.3 percent for the week of July 9 after sliding over the two weeks prior. Sales were motivated by a drop in mortgage rates. On a four-week moving average basis, purchase apps were down 16.2 percent from a year ago. Refi apps surged over the week, up 20.4 percent. They were 13.1 percent below their year earlier levels. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell to 3.09 percent in early July.

Robert Dye is vice president and chief economist for Comerica. Daniel Sanabria is senior economist for Comerica.