CPI Continues a Downward Trend
We begin this week’s economic update with a reading on the CPI (Consumer Price Index) inflation rate. The headline rate last week fell to 2.97% year-over-year and continues a downward trend that began a year ago.
However, when we look at the Core CPI (CPI less the more volatile food and energy readings), the rate of core inflation also fell to 4.83%, but that is still more than double the Fed’s target of 2%. Also, the rate of decline is not nearly as steep as the headline CPI.
PPI Shows a More Marked Decline
The PPI (Producer Price Index) inflation rate has a more marked decline as the headline level was barely positive at 0.13% year-over-year, and the core PPI at 2.42% year-over-year.
Therefore, we see a continuation of the production side of the economy weakening and the subsequent lowering of inflation versus the relative strength of the services side and the commensurate persistence of inflation. With the ongoing relative inflationary strength, market participants fully expect the Fed will raise rates in July and possibly later in the year.
Will we see a soft landing for the economy?
Talk of a “soft landing” increased last week as some participants expect the Fed will engineer a reduction of the inflation rate to the 2% target while also maintaining economic growth in the US. While a soft landing is possible, it does not seem likely. Instead we continue to expect the Fed will engineer a recession in either late 2023 or early 2024.
However, the recession we expect will not be as bad as the recession in 2008, partly because households have much lower debt ratios and can better withstand a recession.
As you can see in the chart below the debt service as a percent of disposable income is much lower than in times past.
Keeping An Eye Out for Areas of Strength
Looking ahead in the week of July 17th, we will get readings on production, retail sales, housing starts, and existing home sales, which will give us an indication of areas of strength in the economy.
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