Inflation Matches Expectations

The most significant economic data released this week focused on inflation, and the results were very close to the expected levels. The European Central Bank meeting also revealed no major surprises. Mortgage rates declined a bit more to the lowest levels since early 2023.

Although this annual rate is down significantly from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Shelter (housing) costs were 5.2% higher than a year ago and continued to be a primary reason why inflation remains stubbornly elevated. By contrast, several categories posted declines in July including used car prices and medical care services.

Another significant inflation indicator released this week which measures costs for producers also was essentially in line with the consensus forecast. The core Producer Price Index (PPI) was 2.4% higher than a year ago, the same annual rate as last month. Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

At its June meeting, the European Central Bank (ECB) implemented its first rate cut since September 2019. On Thursday, the ECB again reduced benchmark interest rates by another 25 basis points, as expected. The statement released after the meeting continued to emphasize that future monetary policy decisions will be based on incoming economic data, while providing no specific guidance. Investors anticipate that there will be one more 25 basis point rate cut by the ECB before the end of the year.

The next Fed Meeting will take place on Wednesday. Most investors expect a 25 basis point rate cut, while some anticipate a larger 50 basis point reduction. For economic reports, Retail Sales will be released on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will come out on Wednesday and Existing Home Sales on Thursday.