Consumers keep spending.
Retail sales were up by 0.5 percent for July, with June revised higher to 0.9 percent. Core retail sales (the retail control group) also increased by 0.5 percent (0.8 percent for June). It is important to note that these figures are not adjusted for inflation, and with the CPI up by 0.2 percent (0.3 percent for core), some of the increase came from prices. Was some of this from higher tariffs? Probably, but it’s hard to determine how much at this point. Also released today were import prices, which climbed by 0.4 percent for July – and any tariff impacts would be on top of this increase.
Spending in the retail sales report was up in most major categories, although gasoline station sales (mostly fuel) were unchanged with declines in gasoline prices. Overall, the upward revisions to June and the solid gains for July suggest that consumers are still active, despite slower payroll gains.
The Personal Income and Spending report at the end of the month will incorporate the July CPI/PPI and retail sales reports. This week’s inflation reports suggest that the PCE price index will increase at a modestly faster pace for July rather than edge lower. Today’s retail sales report (plus the upward June revisions) suggests good momentum at the start of the third quarter, with a solid gain in nominal PCE for July likely. How much of that will be offset by higher prices in determining real PCE remains to be seen.
July PCE inflation, August CPI, and July employment will be the key determinants of what the Fed does at the September FOMC meeting. The CME Group’s FedWatch tool indicates an 89 percent chance of a 25 basis point cut in rates in September, but those probabilities could change significantly depending upon what those three data points show.
David W. Berson, Ph.D., CBE
Chief Economist
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