Latest CPI reading took some steam out of the inflation debate. August’s reading of the Consumer Price Index (CPI), one of the most frequently used statistics to assess price changes associated with the cost of living and therefore inflation, decelerated for a second straight month, to 0.3% from July’s 0.5%. The index rose 5.3% compared to a year earlier. Core CPI, which excludes food and energy, rose 4.0%, down from 4.3%, a 30-year high, in July.

The gauge showed that the resurgence of the delta variant has reduced price pressures for goods in reopening categories, e.g., things like airfares, rental cars, and the price of hotel rooms, as Americans dined and traveled less for fear of contracting the virus. However, the index also showed that higher prices persist in goods categories that consumers use frequently:  the cost of clothes, home electronics, appliances, and furnishings all remain near pandemic highs as supply-chain bottlenecks remain elevated.

Comprising about a third of the CPI, measures of the cost of renting posted monthly gains consistent with life before the pandemic, at 0.3%,the fastest increase since March 2020, while the larger owners’ equivalent rent measure – a gauge of rental inflation –  matched what’s been seen in overall inflation over the last few months. With the federal eviction moratorium now expired – some states have extended them – pressure to reset rents higher will likely drive more solid gains in rents into 2022.

Our take: While turning down the heat, the latest CPI data doesn’t spell the beginning of the end of the inflation debate, it just extends it. As the peak case load of the delta variant passes, some upward pressure on prices will return. The trillion-dollar question? What it means for the Fed’s tapering plans. In short, not much. We still expect the Fed will begin the process of formally easing off the gas pedal in December, at the latest.

August retail sales beat expectations. In another measure of the health of the US consumer, retail sales surprised to the upside in August, rising 0.7%. Stripping out auto sales, which have been held back by a shortage of semiconductors, sales rose a robust 1.8%. Along with a pair of upbeat regional Federal Reserve Bank indices from New York and Philadelphia, the data helped allay fears that the spread of the Delta variant is taking a sharp toll on economic growth. While inspiring, the data weren’t all positive. July’s retail sales gauge was revised to a 1.8% decline, from -1.1%. Total retail sales are down 5.2% annualized over July-August from the Q2 average. All told, retail spending continues to show a deceleration in consumer spending from a stellar performance in the prior two quarters.  Keep in mind the consumer has a lot of cash burning a hole in their pocket, and will be ready to spend anew once pandemic fears begin to ease.

Our take: Comprising 70% of America’s economic activity, the spending habits and attitudes of consumers are critical to the speed and breadth of economic recovery. The retail sales results are consistent with an economy constrained by supply disruptions and Delta-variant related uncertainty, spurring many economic pundits to recalibrate their rosy Q3 growth forecasts. Consensus now calls for a rise in Q3 GDP of 4.0%, down from 5.4% last month. Is it enough to delay the Fed’s tapering plans? Nope.

Lagging consumer sentiment warns of rocky jobs future. The preliminary reading of the University of Michigan’s consumer sentiment index –  an economic indicator that measures how optimistic consumers feel about their finances and the state of the economy – for September rose to 71.0 from 70.3 a month earlier. The consensus estimate was 72.0. Aside from last month’s print, this was the lowest reading since the pandemic began. The negative shock, related to the delta variant, of high prices and scant inventories showed little sign of easing.

Our take: The fact that consumers see buying conditions are so poor is in part a reflection of a view that buying conditions – the combination of product shortages and high prices – will eventually normalize. That view is evidence that inflation expectations, what the Fed cares about most, are still low. However, with some product shortages set to persist, a too-high and too-fast rise in prices on consumers purchases can change the inflation dynamic quickly, potentially causing the Fed to pull back the punchbowl sooner rather than later. Fun fact: A record 56 cargo ships are anchored off the Southern California coast awaiting space in port, further tangling supply chain snarls.

All of last week’s lumpy data leads us to the conclusion that the Fed will remain on its slow, methodical and measured path toward tapering asset purchases amid uncertain economic risks.