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Don’t Declare the Battle Over Yet

Retail Sales Data Gives Fed Reason To Fight On

By Christine Cooper and Rafael De Anda

CoStar Analytics

August 16, 2023 | 7:30 AM


The Federal Reserve’s fight to tame inflation has been underway for almost a year and a half, and hopes are emerging that policymakers might be winning based on last week’s data on prices.


The Bureau of Labor Statistics reported that the consumer price index rose by just 0.2% in July, similar to the gain the month before, and 3.2% over the past 12 months. Monthly growth in the index has averaged 0.3% so far in 2023, compared with 0.5% in 2022 and 0.6% in 2021. Clearly, this is progress.

Core CPI, which excludes the volatile food and energy components, also has decelerated, up by 0.2% in both June and July.


Prices of the goods and services that were major drivers of high inflation a year ago have been easing. For example, new vehicle prices fell by 0.1% in July while prices of used cars and trucks fell by 1.3%. Widespread inventory shortages at auto dealerships last year have been restocked and higher interest rates have been cutting into buyer’s budgets, reducing the competition among shoppers and leading to less pressure on prices. Prices of other pandemic-boosted goods such as furniture and recreational items such as electric bikes and exercise equipment also have been on a downward trajectory.

Inflation would be slowing further were it not for shelter costs, which accounted for more than 90% of the increase in the overall price index. Owners’ equivalent of rent grew by 0.5% and was 7.7% higher than a year ago, while rents grew by 0.4% in July and were 8% higher than a year ago.


Those numbers have yet to reflect a recent cooling of the housing market. The median home price in June was 0.9% lower than a year before, according to the National Association of Realtors. Asking rents in apartments, meanwhile, have been decelerating on a year-over-year basis since they peaked in March 2022, whereas the rent component of the CPI peaked just this past April. Excluding shelter, the consumer price index was flat in July and only 1% higher than a year ago — well below the Federal Reserve’s target rate of inflation.


Unfortunately, home prices more recently have been on the rise again, and month-over-month apartment rents also have been heading higher, suggesting that while current inflation indicators are set to ease, they may well revert higher sometime down the road.

In a separate report published by the Bureau of Labor Statistics, producer prices ticked higher in July. So-called final demand, or the prices producers were able to set, grew by 0.3% during the month, the highest rate of growth since August 2022. The index was driven by rising prices for intermediate unprocessed goods, including energy materials. These items are far down the production pipeline, so they may take awhile before they affect consumer prices.

What We’re Watching …

Wall Street is waiting to see whether the Federal Reserve raises its target interest rate higher later this year. Many are broadly betting against that happening as they see the inflation battle already won. But the recent release of retail sales data for July shows why the Fed and Chairman Jerome Powell are well-advised to keep all options open.


Households appear ready, willing and able to spend robustly, as a strong labor market boosts job gains and wage growth, and excess savings accumulated during the pandemic have not been run down yet. Strong consumer demand works against the Fed’s goals of cooling the economy, which has experienced four consecutive quarters of above-trend growth and could see a fifth quarter follow.


Don’t expect Powell to declare an end to the Fed’s battle against inflation anytime soon.


CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.


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