Hello, my friends!
It was yet another eventful week in financial markets catalyzed by – who else? – President Trump. More talk of replacing Federal Reserve Chair Jay Powell as well as reports that Trump won’t settle for any less than a 15% tariff on EU imports kept the major indexes in check despite some relatively upbeat numbers from elsewhere in the economy.
For the week, the Dow Jones Industrial Average finished a little lower than where it started, while the S&P 500 and Nasdaq Composite still managed to post gains of 0.6% and 1.5%, respectively.
And as far as some of the economic week’s other high-profile numbers are concerned:
Consumer Price Pressures Intensified Last Month…
Among the biggest releases were two popular inflation measures: the consumer price index (CPI) and the producer price index, which gauges price pressures at the wholesale level.
First up were the consumer numbers. On Tuesday, the Labor Department revealed that headline, or all-items, CPI accelerated 0.3% on a monthly basis in June…two-tenths of a point faster than May. CPI accelerated on an annual basis in June, as well, rising 2.7%, which is three-tenths of a point faster than the pace set in May.
As for core CPI, which strips out volatile food and energy prices, both the monthly and yearly numbers also showed inflation picking up speed in June.
For the month, core CPI rose 0.2%, which is a tenth of a point faster than May, while year over year, core increased 2.9%, up from May’s 2.8% rate.
Signs of renewed inflation resilience in CPI numbers that had been trending downward through the first several months of the year have added to concerns that White House tariffs may, in fact, exacerbate longstanding price pressures. Of particular note was the monthly 0.4% rise in apparel prices as well as the 1% jump in prices of household furnishings, goods categories that are both particularly sensitive to tariffs.
Still, the jury remains largely undecided as to how much of an inflation problem tariffs ultimately will prove to be. Referring to the June CPI numbers, Kay Haigh, global co-head of fixed income and liquidity solutions in Goldman Sachs Asset Management, noted that “on the whole, underlying inflation remained muted,” but warned:
“Price pressures, however, are expected to strengthen over the summer and the July and August CPI reports will be important hurdles to clear.”
…While Wholesale Inflation Showed Significant Moderation in June
Adding to the lack of real clarity over just how much tariffs are bedeviling prices were June’s numbers for the producer price index.
The day after its release of last month’s CPI report hinting at tariff-induced troubles, the Labor Department announced that prices paid by America’s wholesalers didn’t change at all from May on a monthly basis.
According to the data, both headline and core PPI were flat for the month. That was a surprise to economists, who had expected to learn that each measure rose 0.2% in June.
The more subdued monthly numbers reflected particularly favorably on the annual rates, with headline PPI declining to 2.3% from 2.7% in May and core PPI slowing to 2.6% in June after landing at 3.2% the month prior.
“Tariff passthrough is visible in today’s PPI data, but producer price inflation overall remains damper than many expected just a few months ago when the tariffs started rolling out,” noted Oren Klachkin, an economist with Nationwide Financial Markets.
Still, the bigger-picture view of price pressures reveals that headline as well as core inflation remain solidly above the Fed’s 2% target at both the consumer and producer levels, all but ensuring Americans won’t see another rate cut until at least September. As of right now, traders peg the chances of a quarter-point reduction in September at around 53%.
Robust Retail Sales Numbers in June Underscore Continued Consumer Resilience
In other news this week, the Commerce Department reported on Thursday that retail sales rebounded strongly in June after suffering a sizable decline the month before, implying that consumers aren’t quite ready to throw in the towel on spending despite anxiety about potential tariff impacts.
According to the numbers, headline retail sales – which include all categories of goods – rose 0.6% last month. That’s significantly higher than the 0.1% increase projected by economists and a sharp turnaround from May’s sizable drop by 0.9%.
Adjusted for June’s 0.3% rise in consumer prices, which some analysts attribute to tariff-based price pressures, headline retail sales were up a slightly less impressive 0.3%. But other numbers from the report seemed to telegraph that Americans remain enthusiastic about making the nation’s cash registers ring.
On that note, retail sales of the “control group” – a “core” version of the metric which excludes activity at gas stations, auto dealerships and building-material retailers – climbed a robust 0.5% in June. And sales at bars and restaurants, which are seen as a particularly revealing indicator of consumers’ inclination to engage in discretionary spending, jumped 0.6%.
Commenting on the stronger-than-expected sales figures, Heather Long, chief economist at Navy Federal Credit Union, wrote:
“Don’t count the American consumer out yet. There’s still a lot of trepidation about tariffs and likely price hikes, but consumers are willing to buy if they feel they can get a good deal.”
Sentiment Rises Among Consumers Rises as Their Inflation Anxiety Lessens
Finally this week, evidence continues to emerge suggesting consumer anxiety over tariffs actually may be subsiding.
On Friday, the University of Michigan issued the preliminary numbers from its Survey of Consumers for July, which showed an increase in the report’s Consumer Sentiment Index as well as declines in both the one- and five-year outlooks for inflation.
According to the data, the headline metric rose a little more than a point this month to settle at a reading of 61.8…three-tenths of a point above the consensus estimate and the index’s highest level since February.
It likely wasn’t a coincidence that the survey’s most widely followed collateral measures…the outlooks for inflation one and five years down the road…fell at the same time overall sentiment improved.
The one-year inflation forecast landed at 4.4% this month, which is a sizable drop from the 5% expectation recorded in June. As for the five-year inflation outlook, that sank to 3.6%…a drop by 0.4 percentage point from the previous month.
Like the index itself, this month’s numbers for extended inflation are the most favorable readings of those metrics since February.
Jeffrey Roach, chief economist at LPL Financial, is one of many analysts who are at least cautiously optimistic about the implications of the July sentiment numbers.
“Despite risks of rising consumer inflation in the next few months, consumers have well-anchored expectations that tariff inflation will be temporary, and that conditions should improve by the time we enter 2026,” Roach said, adding:
“Inflation expectation is an important factor for the Fed and according to this report, the trajectory looks encouraging.”
That’s it for now; enjoy the rest of your weekend!
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