It was an interesting week. While Fed Chair Yellen was testifying before Congress on Wednesday and Thursday about the Fed’s view of inflation risks, the PPI and CPI reported no inflation in June. The reaction was a loud “What is she worried about?’. The Fed had said they expect inflation to reach their target of 2% by the end of this year. The data released last week does not indicate any pressures are building to achieve this goal. The lack of any surge in consumer final demand was evident in the retail sales for June. Sales are measured in dollar terms with no adjustment for price changes. The weak report was impacted by declining prices, even as unit volume increased. Prices must stabilize in order for the unit volume growth to generate better overall growth. The result is the core rate for the CPI has now increased by 1.7% over the past year. It had increased by 2.3% during 2016.

The first half of this year has been a weak growth period and the lack of demand growth is making it difficult for anyone to raise prices. Demand must rise in order to generate the level of inflation the Fed wants to achieve. Without higher inflation, interest rates are not going to rise from current levels…

ProBank Austin Advisor – July 17, 2017