July inflation data came in mostly in-line with expectations. Retail sales surprised higher while Industrial Production and Housing Starts reflect economic weakening. Equity markets responded by rallying risk assets with the S&P 500 closing just -2% below its all-time high reached last month.

BLS released the July Consumer Price Index (August 14) showing both a headline and core monthly increase in consumer prices of 0.2%. The 1-year headline price increase fell to 2.9% which is the first time the number was below 3% since March 2021. The total price increase in the consumer basket over that period is +18.4%.

The 0.2% monthly increase in core CPI reduced the 6-month annualized rate to 3.2%. A similar monthly increase in August would drop the 6-month trend below 3% the week ahead of the next FOMC meeting.

With consumer inflation elevated but moving directionally towards the long-run 2% target rate, risks related to labor markets and economic growth are gaining more focus. Manufacturing PMI data has consistently correlated with sector contraction over the past 2 years. Similarly Industrial Production (August 15) is stagnant from the pre-lockdown output level. Following economic reopening, Industrial Production rapidly increased, but after the July monthly decline, Industrial Production is now modestly lower from the April 2022 level.

July Retail Sales (August 15) increased 1.0% from June which was the largest monthly increase since January 2023. Equity markets seemed to anchor economic optimism, at least in the very near term, to this positive surprise. I note that the increase was aided by a -0.2% negative revision to June data. I also note the nominal 1-year increase of 2.7% translates to a -0.2% decrease in real sales when adjusted by the 2.9% increase in headline CPI over the same period. My point being despite the monthly surprise, the overall picture relative to economic health provides less confidence. Finally, the Atlanta Fed GDPNow model lowered its 3Q24 estimate for economic growth with Private Investment contribution now projected to contract -2.4%. The change is driven substantially by the fall off in July Building Permits and Housing Starts. The annual rate for Housing Starts as of July is now its lowest number since May 2020.