Truflation: US Inflation Update  August 2024

Executive Summary 

The US economy is continuing to progress positively yet there are continued mixed signals marked by the inflation rate, manufacturing index, wage growth and the evolving consumer behaviour.  The August report sees inflation trends being affected by domestic factors such as consumer spending, employment dynamics and the housing market, combined with global influences like geopolitical tension and continued shifts in the global supply chains.

The August Consumer Price Index (CPI) forecast ranges between 2.5% - 2.8%, with Truflation indicating a 2.6% YoY rate. This follows a trend of monthly deflation driven by decreasing prices in goods and non-core components. Despite the cooling inflation, underlying pressures remain due to persistent issues in the housing and utility sectors.

• Strong Economic Q2 Performance:  The annualized growth rate of 3.0% in Q2 2024, indicates robust economic activity, driven by consumer spending, government expenditures and sizable inventory build-up.  The growth reflects resilience despite ongoing inflationary pressures and high interest rates.
• Personal Consumption Expenditures: Increased spending 2.3% for Q2, up from 1.5% in Q1, demonstrates continued consumer resilience. Despite high interest rates, spending in sectors like building materials, personal care, and apparel remain strong, although personal savings rates have declined to 3.4%, which could signal reduced financial cushions for households.
• Housing Market: Divergent trends with rising home prices amidst declining sales point to affordability challenges especially for first time buyers.  This pressure might contribute to broader economic concerns if it persists. 
• Employment and Wages: The employment increased less than expected in August, but a drop in unemployment rate to 4.2% suggesting an orderly labor market slowdown continued and with average hourly salaries increasing 3.8% YoY.  Likely to not warrant a big interest rate cut from the Federal Reserve this month. 
• Consumer Confidence: The consumer confidence rose narrowly in August for the second month in a row.  A positive sign suggesting that consumers are optimistic about the labor market despite concerns about Inflation and interest rates.

In addition to this the fast approaching presidential election combined with the senate and house seats, are too close to call and could lead to increased spending and economic uncertainty. The tighter the race the more likely the higher the spending, the closer we get to Election Day.

Overall, while the US economy shows strong growth and consumer resilience, inflationary pressures, housing market challenges and high interest rates continue to create a complex economic environment.  The path to lower inflation remains extremely bumpy, with interest rates expected to start coming down and loosening the drag on American hard-earned finances.  Expectations are that this CPI release will act as a catalyst to reignite hopes that the Central Bank will cut rates more than previously anticipated, perhaps driving the return of expectations for two cuts this year. However, we still believe a slower rate of cuts will be more positive for the markets and the consumers.

The Mysterious Labor Market

Economists and market analysts have been predicting a softening of demand which is in turn the driver of unemployment slowdown.  However we haven't seen a slowdown in demand either through consumer spending or retail sales.  Additional recent positive sales numbers in the Q2 earnings reports of key retailers including Walmart, TJ Maxx, Nordstrom, Footlocker, Abercrombie & Fitch, etc have reinforced the strong retail environment. 

Yet this doesn’t reflect the full picture, as we are seeing a significant uptick in start-up business shutdowns and an increasing number of bankruptcy filings, all suggesting challenges in certain sectors.  Despite this, the overall unemployment rate hasn’t risen significantly, which raises questions about the reasons behind it.

The labour force participation has been rising, driven in part by increased immigration, indicating more people are actively seeking work. This larger pool of job seekers could explain why the unemployment rate isn’t spiking, despite rising business closures.

• Labor Force Participation Up: 1.16 million new participants YTD.
• Unemployed Up: 1 million YTD.

Exhibit 1: Labor Participation vs Number of Individuals Unemployed

Source: Bureau of Labor & Statistics

A recessionary labor market requires existing workers to lose their jobs and the size of the labor force to stall or contract, which is what we saw in 2001, 2007, and 2020 but right now the opposite is happening with the labor force now at 158.7 million workers - and has been steadily rising.

The low level of job cuts that we have recently experienced, illustrated by Challenger Gray layoff announcements, has been reported at 461k since January 2024.  This suggests that the source of the rise in unemployment is not job cuts but a rise in labor supply.  Additionally with the increase in labor supply, it could put downward pressure on wages or lead to more competition for available jobs, which is also what we are seeing in the average hourly earnings for Nonfarm Payrolls, which has reduced from 4.4% YoY in January 2024 to 3.8% YoY in August 2024.

The low jobless claims announced over the last 4 weeks have come in better than expected and as a percentage of the labor force — which is at an all-time high in terms of size – claims look even healthier. At the current levels of around 0.14%, they are at half the range that they were when the 2007, 2001, and early 1990s recessions began. Point being, we need to see claims rise well above 250,000 and stay there into the autumn months before it will be a useful “tell” that recession worries should be front and center. And if the Fed cuts rates in the meantime (as disinflation is giving them room to do), prospects for further job creation should only brighten. 

The U.S. labor market appears resilient overall, with relatively stable unemployment and low jobless claims. However, the rising business shutdowns, increased labor force participation, and downward wage pressure highlight underlying vulnerabilities. The market is absorbing a larger number of job seekers, which is keeping unemployment in check but exerting downward pressure on wages.

Recent inflation trends

Inflation has been hanging around for much longer than expected but has been gradually coming down this month, breaking the 3% year on year mark in July, coming in at 2.9%.  This month, the August number is likely to come down further with a significant  year on year drop, primarily driven by level of the indexes.

Truflation’s forecast of a 2.6% year-over-year (YoY) CPI for August suggests continued moderation in inflation. This forecast aligns closely with the market expectations, which range between 2.5% and 2.8%.  This is the third consecutive month of declining inflation as per Truflation, and indicates a positive trend, driven largely by falling prices in goods and non-core components in particular. 

Exhibit 2  - Truflation key inflationary metrics: Goods vs Services vs Core Inflation

Rental prices are beginning to decline, which could ease some inflationary pressures in housing costs. However, owned housing prices are projected to rise, potentially counteracting some of these benefits.

In addition to the labour market uncertainty we discussed earlier, inflation will also be affected by the supply chain constraints, which has been a persistent problem, and will exert inflationary pressures. These constraints affect the availability and cost of goods, contributing to longer-term inflation.

Oil prices and geopolitical tensions are significant factors that could influence inflation trends. Fluctuations in oil prices directly affect transportation and production costs, while geopolitical instability can disrupt supply chains and market stability.

While inflation is showing signs of moderation, driven by falling prices in goods and the rental markets, there are concerns about rising housing costs and ongoing supply chain disruptions. The labor market remains relatively stable but is influenced by increased participation and wage pressure. Long-term inflationary risks are very present.

Sector-Specific Inflation Analysis

• Food & Non-Alcoholic Beverages: Prices in this category fell by 0.6% MoM and rose by 1.6% YoY. The slowdown in price growth was driven by declining commodity prices and labour costs. In the out-of-home category, consumers are becoming price sensitive and downgrading to lower priced menus and restaurants. This, coupled with the summer travels has likely resulted in people eating out.
• Housing: The housing sector has seen mixed results with sluggish home sales and minor month on month gains, but yet, year on year homes sales prices are up 3.7%.  This is in part due to the low inventory levels with unsold homes at 1.33M -  equal to 4 months supply. Greater choice and affordability as mortgage rates continue their downward trend in anticipation of rate cuts.  Rental market has seen its first decline in over 3 years.
• Transportation: Transportation costs decreased by 0.2% MoM and increased 1.3% YoY. There are mixed results in this category with public transportation and car vehicle prices rising, but is offset by the reduction in gas prices as a result of the fallen prices of Crude oil.
• Utilities: Prices for utilities rose by 0.2% MoM and 2.9% YoY, driven by higher costs for electricity, natural gas, and water. The significant investments in infrastructure, higher labor costs, combined with the higher demand of electricity over the summer months have driven these costs upwards. 
• Household Durables and Daily Use Items: Household operations costs have risen 0.2% MoM and 1.1% YoY.  There are two components to this, the services element of household operations which have been relatively stable due to the labour costs.  Secondly, household durable prices have been on the rise due to investments by consumers in durable items for clean energy and elevated logistical costs.
• Education: This category has experienced an increase of 0.2% MoM and 2.6% YoY.  The driver of these increases are the continued follow through of the rise in teachers salary, combined with the institutional investments made to keep up with market demand. 

Longer term views

The U.S. economy is continuing to show resilience, with inflation cooling but underlying pressures persisting. The second half of 2024 is likely to see continued volatility as the economy grapples with the lingering effects of high inflation, interest rates coming down and a potentially cooling labor market. While consumer confidence remains relatively strong, particularly among higher-income households, there are growing concerns about the sustainability of current spending levels given the sharp decline in the personal savings rate.

There are positive cooling effects to inflation which include the rebalancing of the labor market. If the labor market stabilizes and wages grow at a more moderate pace, it could ease upward pressure on service prices. Service sectors, which often experience price hikes during periods of labor shortages, might see more stable pricing if employment levels balance out. Secondly, there is the student debt repayments resuming which could reduce disposable income for many individuals, potentially leading to lower consumer spending. This could help ease demand inflation pressures as consumers cut back on non-essential purchases.

On the flip side, we see a number of factors that need to be addressed in order to bring structural alignment on inflation.  These factors include:

• Housing Supply Constraints: Persistent constraints in housing supply combined with long overdue demand as interest rates come down and housing affordability especially for the 1^st time buyers comes back into reach.  This demand can continue to push up home prices.
• Rising Insurance Premiums:  As insurance premiums continue to rise, it no doubt will impact both individual household budgets and business operating costs.
• Interest Rate Cuts: While interest rate cuts will stimulate economic activity and support growth, this will also no doubt lead to higher inflation as demand outstrips supply. The timing and scale of these cuts will be crucial in determining their impact on inflation.
• Elevated Logistical Costs: Ongoing logistical challenges and high costs related to transportation, warehousing, and supply chain disruptions will keep prices elevated especially in shipping.  This is expected to ease as we come out of Q4.
• Mid-Term Political Uncertainty: The uncertainty of the outcome of the presidential elections will result in accelerated campaign spending which will boost economic activity.

Truflation’s observation is that it should cool before rising again in Q4.  Temporary factors will reduce it in the short term but the underlying issues (like housing, onshoring, logistical costs etc) will push inflation back up.  

Conclusion

The path forward for the U.S. economy is fraught with challenges, but also opportunities. By staying informed and nimble, businesses, policymakers, and consumers alike can navigate the complexities of this economic environment. The soft landing remains plausible, but it will require careful management of the factors driving inflation and economic growth.

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 14 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with four predictions spot on and all but one deviating by no more than 20 basis points since coverage was initiated.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on August 2024

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