Which line produced the monthly calm?
The producer price index for final demand was unchanged in July after seasonal adjustment. The goods side fell 0.7 per cent, energy prices dropped 3.1 per cent, and a 5.7 per cent decline in gasoline accounted for more than half of the fall in goods. In the same month services rose 0.2 per cent and construction advanced 2.2 per cent.[1]
Over the twelve months to July the headline index was up 4.7 per cent, and the measure that excludes food, energy and trade services was up 4.7 per cent as well. The annual rate that emerges once the volatile components are excluded equals the annual rate calculated with them. That is the part worth holding on to: the components that made July look quiet leave the yearly rate exactly where it was. The monthly drop in gasoline is real, and it is a price that can reverse in a single print.[1]
Which balance sheet is holding the cost?
The largest monthly increase was in construction, at 2.2 per cent, and construction is bought with credit. The price of that credit barely moved: the survey by Freddie Mac put the 30-year fixed mortgage at 6.67 per cent this week, against 6.69 per cent a week earlier and 6.58 per cent a year ago. The producer's input cost is rising while the rate that decides whether the buyer can carry the loan sits roughly where it sat twelve months ago. Follow both sides at once: the builder books a higher cost, and the household that would absorb it borrows at a rate the summer's slowdown has not reached.[1], [2]
The income side has not cracked yet. Initial claims for the week ending 8 August were 209,000, up 9,000, the four-week average stayed at 199,000, and the insured unemployment rate was 1.2 per cent. A labour market at that level keeps wage income flowing into the same demand the higher costs are charged to, which is the condition under which a cost increase can be passed on rather than absorbed in margin. The competing reading is that claims are a lagging indicator and the four-week average is smoothing a turn that has already begun.[3]
What does a speech prove?
Beth Hammack, who votes on the Federal Open Market Committee, told business leaders in Dayton the same day that she is not confident the softer readings will continue or go far enough to return inflation to 2 per cent. She said inflation has proven more persistent than many expected since the pandemic, and that policy is about where the economy will be in three, six and twelve months. Consumer prices had risen 0.1 per cent in July and the annual rate had eased to 3.4 per cent. Her doubt is information about the committee's reaction function; it shows how one voter reads the data, and it adds no transmission result to the data.[4]
Two days ago I wrote here that July's consumer headline looked calm because gasoline retreated for a month while rent kept rising at the same pace. The producer figures point to the same place from upstream, and they add the year to the month: strip out the components that produced the calm and the twelve-month rate stays where it is. If crude stays near current levels and the gasoline index stops falling, I expect the next final demand print to show the headline moving back up toward the core. For the core to come down and meet the headline instead, service prices would have to slow separately. The number to watch is the monthly change in final demand less foods, energy and trade services.[5], [1]