U.S. inflation metrics diverge, complicating outlook for cool-down

U.S. inflation metrics gave mixed signals in separate reports Friday, complicating a narrative of moderating price pressures in the world’s largest economy.

Consumer inflation expectations as measured by the University of Michigan unexpectedly fell in early August, despite higher gasoline and grocery costs.

Meantime, producer prices grew last month by more than expected, primarily due to increases in certain service categories.

The divergence suggests a uneven path ahead for inflation that is otherwise moderating.

Data out Thursday showed an underlying measure of consumer prices posted its smallest back-to-back increases in two years.

That bolstered hopes that the Federal Reserve can tame price pressures without sparking a recession.

Friday’s data are important to the central bank’s calculus as to how they’ll proceed with policy from here.

While officials will take comfort in seeing inflation expectations coming down, several categories in the producer price index report feed directly into a separate inflation metric preferred by the Fed – and they jumped in July.

That measure, known as the personal consumption expenditures price index, will be released later this month. And it has the potential of keeping the Fed’s Open Market Committee tilted toward raising interest rates, despite several economists’ assertions – and even some from Fed officials themselves – that it’s time to stop.

“While yesterday’s soft core CPI print likely buys more time for the FOMC to deliberate on the future path of monetary policy, today’s PPI data suggest that July PCE inflation – the Fed’s preferred inflation measure – will show less progress,” Barclays economists led by Pooja Sriram said in a note, adding that they expect the Fed to raise rates again in November.

Traders still largely expect the Fed to stay on hold in September, but they increased wagers that the central bank will raise rates at its November meeting.

While the monthly PPI figures came in above estimates, downward revisions to the prior month tempered some of the strength.

But the details of the report suggested some trouble spots remain.

Service costs rose by the most in nearly a year, reflecting increases in categories including portfolio management, outpatient care and passenger transportation.

Subgroups that feed into the PCE calculation, including health care and brokerage services and investment advice, accelerated last month.

The prices of goods rose slightly, boosted by the biggest increase in food costs since November.

Core goods prices, excluding food and energy, were flat after a decline in June.

Weaker goods prices in recent months have flowed through to consumers in the form of lower prices – something known as deflation.

That’s helping keep inflation expectations low.

Americans expect prices will climb at a 3.3% rate over the next year, down from the 3.4% expected in July, according to the preliminary August reading from the University of Michigan.

They see costs rising 2.9% over the next five to 10 years, compared with last month’s 3%.

Even so, sentiment eased and more than a third of consumers say that high prices are eroding their living standards.

And while the median year-ahead expectation fell, it actually rose on average.

The Fed will receive several other data points before its September gathering, including the July PCE and another look at consumer and producer prices, employment and inflation expectations.

While inflation has generally been cooling without much damage to the jobs market, not everyone has ruled out a recession just yet.

“Prospects of a soft-ish landing were handed some reinforcement by the mild U.S. CPI for July,” Douglas Porter, chief economist at BMO Capital Markets, said in a note.

“Still, the debate remains open amid a somewhat heavier PPI, rising oil prices, a renewed backup in bond yields, and a struggling Chinese economy.”