Highlights:
- Headline inflation and core CPI rose 0.2% in July, reflecting controlled price pressures and the lowest year-on-year CPI reading since March 2021.
- Consumer spending rose sharply, with retail sales up 1% month-on-month. The automotive sector played a key role in this recovery, highlighting the resilience of consumer demand.
- There was a decline in both building permits and housing starts in July. However, a high permit rate suggests potential future growth, but the housing market still faces challenges.
Headline inflation and core CPI
The July CPI report confirmed a continued decline in year-over-year inflation to its lowest level since March 2021. 90% of July’s monthly increase was due to housing, and excluding housing, inflation is below the Fed’s target. Moreover, the housing situation will not improve with tight interest rates because new housing construction has declined in response to high interest rates, but we have a persistent supply shortage that requires years of higher production.
- In July, as expected, headline inflation and the core consumer price index (CPI) rose by 0.2 percent.
- Residential construction recorded a significant monthly increase, rising to 0.4%, a jump from the previous 0.1%.
- The transport sector was again disinflationary at -1.3%, despite a slight increase in fuel prices, as new and used car prices and airfares continued to fall.
- New car prices fell 0.2%, while used car prices fell a whopping 2.5%. We saw no price changes for new cars in July, but incentives were increased. We saw mixed trends for used car prices in July, as wholesale prices rose but retail prices fell.
- The headline CPI fell to 2.9% year-on-year, its lowest level since March 2021.
Positive retail sales report
Retail sales posted a strong 1% monthly gain in July, driven by a recovery in auto sales and services that had been artificially curtailed by software outages in June. Excluding auto sales, retail sales rose 0.4%. Adjusted for inflation, retail sales, including auto sales, fell 0.1% year-on-year.
- Initial retail sales data for July showed a strong 1% monthly increase in consumer spending, following an auto-market-related sales decline in June due to unusual circumstances.
- The automotive sector outperformed the rest of the retail market as sales excluding motor vehicles and parts rose 0.4%, while sales of motor vehicles and parts rose 3.6% after a 3.4% decline in June.
- The development at category level was predominantly positive, as nine of the twelve main categories recorded sales increases during the month. The largest increases were recorded in the automotive market and the furniture, furnishings, electronics and household appliances stores (+1.0%).
- Retail sales rose 2.7% year-on-year, up from a year-ago increase of 2.0% in June.
Decline in residential construction trends
New construction trends were negative and worse than expected in July. Housing starts are expected to improve in the coming months as the number of building permits exceeds the number of single-family and multi-family housing starts.
- The development in residential construction was negative in July, as both permits and housing starts declined and were worse than expected.
- Approvals fell by 4.0%, and the seasonally adjusted annual rate of begins to sinkd by 6.8%, both values higher than forecast.
- However, the approval rate of 1.396 million units was higher than the construction rate of 1.238 million units, suggesting a possible increase in housing starts in the coming months.
Consumer sentiment improves slightly
Consumer sentiment shows mixed but little changed trends for August. Consumers’ assessment of vehicle purchasing conditions improved slightly but remained at very low levels. Consumers’ assessment of vehicle prices and interest rates remains very negative.
- The University of Michigan’s first August reading showed a modest 2.1% increase in consumer sentiment to 67.8, slightly better than expected. Despite minor improvements, overall sentiment remained low, falling 2.3% year-over-year.
- Consumers’ assessments of vehicle purchasing conditions have improved slightly, but remain at very low levels. At the same time, consumers’ assessments of vehicle prices and interest rates remain very negative.
- Morning Consult’s daily consumer sentiment index remained unchanged in mid-August, although sentiment was somewhat volatile. The index rose 2.9 percent in July and was 4.0 percent above the year-ago reading on August 15. It has risen 1.1 percent since the beginning of the year.
- The average price of unleaded gasoline has fallen 1.4% since the beginning of the month, to $3.43 per gallon as of Aug. 15, according to AAA. Gasoline prices are down 11% year-over-year, but up 10% year-to-date.
Jonathan Rauch
Chief Economist
Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail automotive markets using proprietary data from the company’s business units and platforms. For 28 years, Smoke has focused on translating data and trends into relevant, actionable insights for the industries that drive the largest purchases consumers make in their lives: real estate and automobiles. Smoke joined Cox Automotive in 2017.
