Cooling inflation and job market

It’s taken awhile, but the elusive sub-3% annual inflation(1) is now a reality, seemingly providing the Federal Reserve with enough justification to cut rates at its September meeting. The Consumer Price Index (CPI) for July increased by 0.2% from June and 2.9% from the previous year, marking the lowest annual rise since March 2021(1). Shelter costs continue to be a sticky point in the inflation reports and were the main driver of July’s inflation, accounting for 90% of the monthly rise in headline CPI(1).  Excluding food and energy costs, core CPI rose 3.2% year-over-year, the lowest since April 2021(1). Fortunately, the price of goods has consistently declined over the year so far, offering needed relief to consumers.

News on the jobs market garnered a lot of attention and seemed to trigger some of the recent market volatility. The US job market showed signs of cooling in July, with nonfarm payrolls increasing by a modest 114,000 and the unemployment rate rising to 4.3%, the highest in nearly three years(2). Job gains were significantly below expectations and marked one of the smallest increases since the pandemic(2). The good news, however, was that the rise in unemployment was primarily driven by new workers entering the labor force and not job losses(2).

Despite a weaker jobs market, July retail sales accelerated by the most since January 2023, rising 1%(3). Consumers prioritized essential purchases, such as groceries, and held back on discretionary spending(3). With weakening consumer confidence and a softening labor market, the outlook suggests that spending will likely remain focused on essentials, with discretionary spending expected to decline further.

Bottom line

Progress has clearly been made in reducing inflation. The question is, will the labor market suffer as a result, or will the economy continue to grow at a reasonable pace? The Federal Reserve is poised to potentially lower interest rates at its September meeting, influenced by cooling inflation and a softening job market. The upcoming Personal Consumption Expenditures Price Index (PCE), along with August inflation and jobs reports, will be key in the Federal Reserve’s next steps. Recent market volatility has followed some of these updates as investors attempt to determine if there are cracks showing in the economy or not. If upcoming reports fail to impress investors, that may continue to be the case leading up to the Federal Reserve’s meeting in September.

(1) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(2) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(3) Source: Census Bureau, https://www.census.gov/retail/sales.html