Truflation: US Inflation Update July 2024

Executive Summary 

The U.S. economy has been navigating through a period of significant uncertainty, marked by fluctuating inflation rates, supply chain disruptions, and evolving consumer behavior. As of August 2024, inflation trends are being shaped by a combination of domestic factors—such as consumer spending, employment dynamics, and housing market pressures—and global influences like geopolitical tensions and shifts in global supply chains.

The July Consumer Price Index (CPI) forecast to be between 2.7% - 3.1%, with Truflation indicating a 2.8% 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.

• Economic Growth: The U.S. economy grew at an annualized rate of 2.8% in Q2 2024, outperforming expectations. This growth was fueled by strong consumer spending, robust government expenditures, and a significant build-up in inventories. Personal consumption expenditures saw an increase of 2.3% for the quarter, reflecting resilience in consumer demand despite ongoing challenges such as high interest rates and persistent inflation.
• Employment and Wages: The unemployment rate rose to 4.3%, the highest in nearly three years, yet still relatively low. Job gains were the second lowest since 2020, and wage growth has started to slow. This raises questions about whether the economy can continue to achieve a soft landing without tipping into recession.
• Consumer Confidence: Truflation’s Consumer Confidence Index increased in July, marking a reversal from June’s downward trend. This increase, although modest, reflects a positive outlook among consumers, particularly those earning over $100,000. However, inflation, interest rates, and long-term economic growth remain significant concerns.

This suggests that the path to lower inflation remains extremely bumpy and the current interest rates will continue to be a drag on American hard-earned finances.  We expect this CPI release to 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 or a bigger cut in September. However, we still believe a slower rate of cuts (smaller and more often) will be more positive for the markets and the consumers.

Recent inflation trends

Inflation is hanging around for much longer than expected and was holding steady since the beginning of the year, though over the last few months, it has begun cooling, down from 3.4% in April to 3.0% in June.  Overall, though, it appears elevated inflation has yet to disappear.  

Against the background, the Fed has signaled that rate cuts are back on the agenda but needs to see continued progress on the data ahead of the September meeting.  With inflation remaining above the 2% target and modest progress on taming it, policymakers remain cautious and need to see the labor market softening.  Our forecast continues to hold steady that the first rate cut will commence in September.

The labor market has shown signs of deceleration, with unemployment rising to 4.3%, its highest level in nearly three years. This increase, though still within a historically low range, reflects the broader economic cooling. Job gains have been the second lowest since 2020, and wage growth has started to slow, indicating that the labor market may be reaching a turning point.

Exhibit 1 - Previous Month Change in Non-Farm Payroll & Unemployment Rate

Source: Bureau of Labor & Statistics

Despite these signs, the economy has so far avoided a full-blown recession. The debate continues over whether the economy can achieve a “soft landing,” where growth slows enough to curb inflation without leading to significant job losses. The increase in consumer confidence, particularly among higher-income households, suggests that many still see the labor market as relatively strong, albeit with growing risks.

The U.S. economy’s 2.8% growth in Q2 2024 marked a strong performance compared to the anticipated 2.0%. This expansion was primarily driven by consumer spending, which accounted for a significant portion of the growth. Personal Consumption Expenditures (PCE) increased by 2.3% for the quarter, up from 1.5% in Q1. Both goods and services spending saw solid increases, with retail sales continuing to rise despite headwinds like high interest rates and persistent inflation.

Exhibit 2 - U.S. Gross Domestic Product; Percent change from previous quarter

Source: Bureau of Economic Analysis

The strength in consumer spending was particularly notable in categories such as Building Materials, Personal Care, and Clothing stores. Retail inventory levels, while generally declining—a sign of healthy demand—showed an exception in the automotive sector, where inventories have continued to increase. This sectoral divergence highlights ongoing challenges in supply chain management and consumer demand patterns.

However, the drop in the personal savings rate to 3.4% is concerning. This decline suggests that consumers may be depleting their savings to maintain their current levels of spending, which could lead to weaker consumer demand in the future if savings continue to dwindle.

The housing market remains a significant source of both inflationary pressure and economic uncertainty. Housing prices as Truflation reports it has fallen 0.49% MoM in July but were up 1.71% YoY, representing 23.2% of household expenditure. The decline was primarily driven by owned dwellings, where prices dropped by 0.5% MoM due to the interest rates coming down.  Rented property prices remained stable.

Sales of new residential homes dropped by 0.6% MoM in June, and existing home sales declined by 5.4% MoM, according to the National Association of Realtors (NAR). This decline is largely due to rising home prices, which continue to put pressure on first-time homebuyers. The median price of existing home sales increased by 2.3%, marking another monthly rise.

The inventory of unsold existing homes increased by 3.1% MoM to 1.32 million, or the equivalent of a 4.1-month supply at the current sales pace. This level of unsold inventory, last seen in May 2020, indicates a gradual shift from a seller’s market to a buyer’s market. With more homes on the market and staying longer, the housing market could be moving towards a more balanced environment. However, the decline in mortgage rates, now at 6.73% for a 30-year fixed rate, could release pent-up demand and drive prices higher in the near future.

Against this backdrop, we have seen a continued slowdown in goods inflation, as a result of the increased discounting, reduction in raw materials, and the rebalancing of inventories. Meanwhile, the services sector has been holding relatively stable due to the wage pressures.

Exhibit 3 - Truflation key inflationary metrics: Goods vs Services vs Core Inflation

The major contributors on the downside in July were housing, food and clothing, while utilities, health, and transportation  were the biggest upward inflation drivers.

Sector-Specific Inflation Analysis

• Food & Non-Alcoholic Beverages: Prices in this category fell by 0.42% MoM and rose by 0.65% YoY. The slowdown in price growth was driven by declining commodity prices and lower wages for employees. In the out-of-home category, consumers are not cutting back on dining out, but they are becoming more strategic by leveraging deals, loyalty programs, and choosing less expensive restaurants.
• Clothing: The clothing sector has contributed to a reduction in inflation, with prices dropping by 0.18% MoM and rising by 1.25% YoY. Consumers remain reluctant to pay higher prices for non-essential items, and retailers have focused on managing inventory levels, keeping prices down. As inventory levels stabilize, prices may begin to rise again, but this will depend on consumer demand and broader economic conditions.
• Utilities: Prices for utilities rose by 0.53% MoM and 1.94% YoY, driven by higher costs for electricity, natural gas, and water. The heatwave throughout July across the U.S. increased demand for electricity, exacerbating price pressures. The rise in utility prices reflects broader trends in energy markets and labor costs, which are likely to persist in the coming months.
• Health: Health costs increased by 0.20% MoM and 3.23% YoY, reflecting rising costs across goods and services within the healthcare sector. The continued increase in health insurance premiums is driven by factors such as rising pharmacy costs, technological advances, and administrative expenses. The healthcare industry faces ongoing pressure from higher employment growth and wage increases, which are likely to keep prices elevated.
• Transportation: Transportation costs increased by 0.25% MoM and 3.33% YoY, with gasoline prices rising by 1.16% MoM. The increase in gas prices is partially due to higher demand during the summer months and the switch to a more expensive fuel formulation. Vehicle purchases also saw a modest increase, with new vehicle sales rising by 1% in Q2. The automotive sector remains under pressure from supply chain disruptions and changing consumer preferences, which could lead to further price increases.

Impact of Monetary Policy

Recent interest rate hikes have been aimed at curbing inflation, but they have also contributed to slower economic growth and rising unemployment. As inflation shows signs of cooling, there is speculation that the Fed may soon begin to lower interest rates. However, the timing and magnitude of these rate cuts will be critical in determining their impact on inflation, the housing market, and consumer spending.

The Fed’s balancing act—between controlling inflation and supporting economic growth—will continue to be a key focus in the coming months. Any missteps could either reignite inflationary pressures or push the economy into a recession. The interplay between monetary policy, inflation, and economic growth will be a crucial area to watch as the year progresses.

Global Context

While this report focuses on the U.S., it is essential to consider global factors that influence domestic inflation. The ongoing conflict in Eastern Europe, trade tensions, and supply chain disruptions have all contributed to global inflationary pressures. The U.S. is not immune to these global trends, and any significant changes in the global economic landscape could impact domestic inflation.

Comparing U.S. inflation trends with those of other major economies reveals a mixed picture. While some countries have seen inflation peak and begin to decline, others continue to struggle with rising prices. The interconnectedness of the global economy means that developments abroad—such as changes in oil prices, shifts in global supply chains, or economic slowdowns in key trading partners—can have significant repercussions for U.S. inflation.

Longer term views

The U.S. economy is at a crossroads, with inflation showing signs of 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, rising interest rates, 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.

The housing market is expected to remain a key area of focus, with prices potentially rising again if interest rates continue to fall and pent-up demand is released. However, the transition from a seller’s market to a more balanced or even buyer’s market could provide some relief for prospective homebuyers, particularly if new inventory continues to come online.

Monetary policy will remain a critical factor in shaping the economic landscape. If the Federal Reserve opts to lower interest rates sooner rather than later, this could provide a much-needed boost to economic growth, but it also risks reigniting inflationary pressures. The global economic environment, with its own set of uncertainties, will also play a significant role in determining the trajectory of U.S. inflation and economic growth.

Conclusion

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

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on June 2024

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.

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