Higher Gas Prices Boost Retail Sales and Prices, but Underlying Trend Points to Softening Consumer Spending and Inflation

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Key Takeaways:

• The Consumer Price Index (CPI) rose 0.6 percent in August, the largest monthly gain since June 2022, according to the Bureau of Labor Statistics (BLS). The higher print was due largely to a 10.6 percent jump in gasoline prices, which contributed to a 5.6 percent increase in energy prices over the month. Prices were up 3.7 percent compared to a year ago, an acceleration of five-tenths but again due primarily to volatile gasoline prices, as well as less favorable base effects. Excluding food and energy, core CPI increased 0.3 percent over the month, though this figure was elevated by an also-energy-related 4.9 percent increase in airline fare and a 0.5 percent increase in rent prices, which continue to lag more timely market measures. On a year-over-year basis, core prices rose 4.3 percent, a deceleration of four-tenths compared to July.
• The Producer Price Index (PPI) increased 0.7 percent in August as energy prices jumped 10.5 percent, according to the BLS. On an annual basis, the PPI was up 1.6 percent. Core PPI increased 0.3 percent for the second consecutive month and was up 3.0 percent compared to a year ago, an acceleration of one-tenth compared to July.
• Retail sales and food services rose 0.6 percent in August, though July's gain was revised downward, according to the Census Bureau. The strength in the topline number is distorted by a price-induced 5.2 percent jump in sales at gas stations; control group retail sales, which exclude food services, autos, building supplies, and gas stations, increased 0.1 percent and were revised downward from a 1.0 percent gain to a 0.7 percent increase in July. Most categories within control group retail sales were roughly flat, though clothing and accessory stores saw a 0.9 percent increase for the second consecutive month.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.4 percent to 103.5 in August, according to the Federal Reserve Board. Utilities output increased 0.9 percent following a 4.4 percent rise in July as unusually warm weather continued. Manufacturing output rose 0.1 percent to 99.7, and mining output was up 1.4 percent to 120.3, its highest level since January 2020.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined six-tenths to 91.3 in August, ending a three-month streak of gains. On net, 24 percent of respondents planned capital expenditures in the next three to six months, a decline of 3 percentage points. Negative 14 percent of firms expect real sales to be higher, 2 percentage points lower than in July. On net, 30 percent of firms plan to raise average selling prices and 26 percent of firms plan to raise worker compensation, increases of 3 and 5 percentage points, respectively.

Forecast Impact:

The CPI came in near our expectations given the recent rise in gas prices. Core goods prices continued their deflationary trend for the third straight month, and core services, while still rising 0.4 percent over the month, continue to be propped up by shelter prices that lag more timely market measures, and saw a big bump from transportation services that was partly due to a rise in airline fare from higher oil prices. Still, various rolling averages continue to show an annualized core inflation rate that is generally trending toward the Fed's two-percent target. As such, we see this report as largely in line with our expectations for underlying inflation to continue to cool in coming months.

Retail sales popped on the headline gain but were also heavily affected by gas prices. Control group retail sales, which exclude gasoline and feed directly into the personal consumption component of GDP, were roughly flat in real terms. While that still sets up consumption growth for a strong third quarter given strength in July, it is in line with our expectations for weaker consumption growth moving forward as income growth continues to lag spending. Industrial production pointed to near-term resiliency in August as manufacturing output rose for a second consecutive month. However, we still expect manufacturing output to soften as the broader economy weakens early next year.

Nathaniel Drake
Economic and Strategic Research Group
September 15, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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