Retail sales posted a modest gain in July and consumer prices advanced as well, delivering some much-needed statistical counterpoints to the deflation-is-fate argument of late. But closer inspection of the numbers leaves plenty of room for debate about the economic outlook. Beggars, of course, can't be choosy and so the numbers du jour are welcome if not exactly cause for celebration.
Let’s start with consumer prices. The consumer price index (CPI) rose 0.3% on a seasonally adjusted basis last month. That's the highest pace since August 2009’s 0.4%. For the weekend, at least, it's harder to argue that deflation is upon us. The latest CPI reading translates into a 1.3% rise over the past year. That’s slightly higher than the previous reading, although the rolling 12-month rate of change for CPI still looks weak, as the chart below suggests.
Rolling 12-month % change in headline CPI
After stripping away food and energy prices from CPI—leaving the so-called core rate of inflation that the Federal Reserve targets—the pricing trend looks considerably weaker. Indeed, core CPI rose a mere 0.1% last month, well below headline’s 0.3% gain. And for the past year, seasonally adjusted core CPI is up by just 1.0%--the lowest since the early 1960s.
Rolling 12-month % change in core CPI
It’s tempting to think that inflationary pressures have merely evaporated and that this is good news for the economy. Indeed, something close to stability on the pricing front is every central bank’s goal. But given the current profile of an economy that appears to be struggling to maintain growth, an unusually low level of core inflation raises questions about the potential for deflation if the economy weakens further in the months ahead.
Whatever concerns are suggested via today’s CPI report, anxiety is minimized somewhat by the news for July retail sales. Last month’s 0.4% jump reverses two straight months of declines. Much of the rise, however, is due to strong auto sales last month, which was reportedly driven by one-time incentives for buyers.
More importantly, the 12-month rolling pace of retail sales is still holding up, as the chart below shows. The annual pace of sales is sure to decline in coming months. Year-over-year comparisons look strong at the moment, but that's largely because last year's readings were unusually depressed. The question is how the trend fares from here on out. Much depends on the labor market, which for the moment is suffering from mediocre growth.
At best, July’s economic profile so far is mixed. Meantime, a fair amount of additional data for July is coming during the remainder of this month and so a complete reading is still up for grabs. For instance, next week brings updates on housing starts and industrial production, followed by July figures for durable goods orders the week after.
Meanwhile, retail sales offer a bit of optimism for thinking that the struggle for growth isn’t lost. It's hardly definitive, but it's all we've got for the moment. But after yesterday’s discouraging news on new jobless claims, it’s clear that the macroeconomic outlook is still cloudy.
One retail sales report certainly doesn't render the last several months of sluggish economic news irrelevant. "There is only one thing that's for sure -- economic momentum has slowed," Jennifer Lee, senior economist for BMO Capital Markets, told AP today.
But given the diminished expectations for the future, one could argue that today's numbers are a turn for the better, if only marginally and relative to pessimistic forecasts. "Consumers are still cautious, but it is not double-dip material," opined Stuart Hoffman, chief economist at PNC Financial Services Group, via Reuters.
Such is the realm of "good news" in the new normal.
This article has been republished from James Picerno's blog, The Capital Spectator.
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