July Consumer Price Index

Joel L. Naroff
President and Chief Economist

INDICATOR: July Consumer Price Index
KEY DATA: CPI: +0.5%; Excluding Food and Energy: +0.2%

IN A NUTSHELL: “There is no rest for the consumer as prices are rising for a wide variety of goods and services.”

WHAT IT MEANS: Once again, the consumer was pushed to the wall by rising retail costs. The Consumer Price Index jumped in July and the increases were pretty much across the board. Gasoline was a major component of the gain but that is unwinding big-time in August. However, food costs just keep increasing. Over the year, food expenses are up in excess of 4% and that is not making the weekly trip to the supermarket very pleasant. Housing rose moderately but we are beginning to see the impact of rent increases. Educational establishments remain in their own world as tuition continues to skyrocket. I cannot wait until my son finally graduates, even if he winds up moving back home. But the strangest situation is in clothing. There was a third consecutive 1% or more monthly increase and over the past three months prices have surged at a 16.4% annualized rate. Apparel has been a moderating influence on overall inflation for years and if we are entering a period of rising prices inflation will be elevated for quite some time. We did see the usual declines in communications and computers while medical care expenses continue to rise at a surprisingly moderate pace.

MARKETS AND FED POLICY IMPLICATIONS: The rise in consumer costs is distressing. It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income. Inflation-adjusted weekly earnings fell in July and are down by 1% over the year. That is one big reason that consumption is so sluggish. The choice is to spend less or save less and in these uncertain times we know which direction households are going. As for the Fed, the core index, which removes food and energy, is nearing the upper bound of its desired range and is likely to be breached in the fall. Worse, the situation with food is not transitory. There is little reason to think food costs will ease sharply and in the long run as millions of people move into the middle class in the developing nations, the outlook for food is for higher than average inflation. The Fed should keep food in its core index and only exclude energy. The Fed’s bet on low inflation looks like a loser even if the top line number comes way down over the next few months due to the falling energy costs. Core prices are on the rise. But Mr. Bernanke has wedded himself to a two year process so inflation over the next few months is not likely to have any impact on Fed policy. In the long run, though, we are likely to be in for a bought of higher than desired inflation, something the inflation hawks will be chirping about and rightfully so. As for investors, right now it’s all about Europe though and report cannot ease any fears.

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