(The Center Square) – Although wages are still rising rapidly, the latest inflation report – the Consumer Price Index – showed inflation easing faster than anticipated.
Consumer prices fell 0.1% in June. Prices are now 3% higher than they were a year ago, down from 3.3% in May. The annual increase in Core CPI eased to 3.3% in June, down from 3.4% last month.
Faster disinflation improves the odds that a Fed rate cut will come just in time before the labor market begins to break under the pressure. With easing inflation and inflation expectations, the current level of the Fed funds rate is becoming more restrictive, opening the door for a rate cut – perhaps as early as the Federal Open Market Committee September meeting.
The latest Fed Beige Book, which summarizes economic conditions in each Federal Reserve district, is likely to indicate a broad slowdown in activity. Lower interest rates will be welcome relief for small businesses, especially since they rely heavily on debt to finance their operations.
This week, data on retail sales will likely confirm that consumers are indeed slowing down. As the labor market cools and expected income falls, consumers tend to spend less, opting to save a higher share of their income. Retail and food services sales advanced just 0.1% in May and are expected to have declined in June.
On the housing front, sales slumped in June and price growth is easing. That combined with a large number of homes still under construction means builders likely pulled back in June. Builder confidence is widely expected to remain in contraction territory.
There’s good news on the horizon for builders. Mortgage rates are declining, meaning potential home buyers could make a late season return. At the same time, the flow of existing homes onto the for-sale market is expected to decline during the second half of the year, leaving the door wide open for an increase in new home sales in the months ahead.
Bond yields and mortgage rates are at their lowest level since March.
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