Economic indicators provide insight into the overall health and performance of an economy. They are essential tools for policymakers, advisors, investors, and businesses. That’s because they allow them to make informed decisions regarding business strategies and financial markets. In the week ending July 11, the SPDR S&P 500 ETF Trust (SPY) rose 0.91%. The Invesco S&P 500 Equal Weight ETF (RSP) was up 2.02%.
Inflation has been at the top of everyone’s minds these last few years, from policymakers and businesses to advisors and everyday consumers. It plays a significant role in the Fed’s interest rate policy and can quickly influence financial markets. Additionally, consumers feel the strain on their budget when prices continue to rise. The Fed has been reluctant to make any changes to monetary policy. That emphasizes the need for more data and confidence that inflation is moving toward its 2% target. The Fed will meet again at the end of this month. There is currently a 91% probability that it will keep interest rates between 5.25% and 5.50% for an eighth straight meeting.
This article summarizes three important economic indicators from the past week to provide insight into the latest trends in inflation and consumer sentiment. The latter has been heavily influenced by inflation over the past few years.
Economic Indicators: Consumer Price Index
Inflation continued to cool last month, surprising to the downside for a second straight month. The Consumer Price Index (CPI) rose 3.0% in June, down from 3.3% in May. That was below the expected 3.1% rise. Compared to the previous month, consumer prices fell for the first time since May 2020, dropping 0.1%. That was lower than the expected 0.1% growth. In June, gas prices continued to offer some relief to consumers’ wallets, dropping 3.8% from May. That helped to slow inflation and offset the continued rise in shelter costs.
Core inflation, which excludes food and energy prices, cooled to its lowest level since April 2021. Core CPI fell to 3.3% on an annual basis. That was below the expected 3.4% growth. Additionally, core prices increased 0.1% from May, lower than the expected 0.2% growth.
It is still up for debate as to when the Fed will begin to cut rates and how many we will see this year. As I said earlier, it is expected that the Fed will hold rates steady at its meeting at the end of this month. The latest CPI numbers support the idea of multiple rate cuts this year, with the first occurring in September (83% probability). There are potentially a few more at the November and December meetings. It’s expected that the Fed will continue to rely heavily on each month’s employment and inflation data before acting too aggressively.
Economic Indicators: Producer Price Index
Wholesale inflation unexpectedly heated up last month to its highest level in over a year, as some inflation pressures remain elevated. In June, the Producer Price Index (PPI) rose 0.2% from the previous month. That was less than the projected 0.1% growth from May. The latest figure is the largest monthly decline for the headline index since October 2023. On an annual basis, the PPI rose 2.6%, an acceleration from May’s 2.4% growth and above the expected 2.3% increase. This is the highest level for the headline PPI since March 2023.
Additionally, the Core Producer Price Index (PPI), which excludes food and energy, was up 0.4% on a monthly basis. That was higher than the projected 0.2% growth. Core producer prices were up 3.0% from one year ago. That’s an acceleration from the previous month’s 2.6% rise in wholesale prices. It’s also lower than the projected 2.5% increase. This is the highest level for the core PPI since April 2023.
The producer price index is widely considered a leading indicator of consumer inflation, as shifts in producer-level prices often trickle down to consumers. The latest PPI report showed wholesale inflation heating up to its highest level in over a year. That could flash warning signs of future increases to consumer prices.
Economic Indicators: Michigan Consumer Sentiment
Consumer attitudes continued to worsen this month according to the preliminary report for the Michigan Consumer Sentiment Index. The July preliminary report came in at 66.0, marking a 3.2% decrease from June’s final reading. The latest reading was well below the forecasted value of 68.5. Although consumer sentiment is more than 30% above its 2022 trough, it has now weakened for four consecutive months and currently sits at its lowest level since November 2023.
The Michigan Consumer Sentiment Index is a monthly survey measuring consumers’ opinions with regard to the economy, personal finances, business conditions, and buying conditions. In the latest report, consumers continued to cite concerns regarding high prices as well as economic uncertainty as a result of the upcoming presidential election.
Consumer attitudes are closely monitored because they help policymakers, businesses, and investors gauge future economic conditions, as confidence levels tend to impact spending behavior. Since consumer spending accounts for approximately 70% of the economy, the spending habits of U.S. consumers have a major impact on economic growth.
The Consumer Discretionary Select Sector SPDR ETF (XLY) is tied to consumer sentiment.
The Week Ahead
The upcoming week will feature the latest figures on retail sales, industrial production, and the Conference Board’s Leading Economic Index. Individually, these metrics provide information on distinct aspects of economic activity: retail sales reflect consumer spending, industrial production measures manufacturing strength, and the Leading Economic Index provides guidance on future economic trends.
The retail sales data could impact interests in the SPDR S&P Retail ETF (XRT), while the industrial production data could impact interests in the Industrial Select Sector SPDR Fund (XLI).
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