Vital Signs: Is Inflation Cooling Off?

On tap: June consumer and producer price indexes, industrial production and housing starts data, regional factory activity reports for July

Federal Reserve Chairman Ben Bernanke travels up Constitution Avenue to testify before Congress and present the central bank's latest economic forecast. While on Capital Hill, the chairman will likely be peppered with questions on inflation, housing, and economic growth.

Wall Street will be on the lookout for any clues on the future path of monetary policy. That includes examining the economic forecast to see if the Fed still expects inflation to remain inside its comfort zone of 1% to 2%, if it still looks for the unemployment rate to rise slightly, and if it projects economic growth to hover at or just below its long-run trend. Adjustments to the prior forecast for this year and next, published back in February, could have significant implications for monetary policy.

Plenty of economic data pertinent to Bernanke's testimony also comes out during the upcoming week. The most important report is likely to be the June consumer price index. The monthly headline number for overall inflation should be tame, as energy prices behaved themselves in June relative to May, but investors also want to see core inflation, which excludes volatile food and energy prices, settling down as well. The June producer price index will also garner some attention for any indications that businesses are facing increased price pressures.

Also, look for June results on housing starts. Economists don't expect much change in the pace of homebuilding activity, but a surprise decline could make life trickier for the Fed. Now that the U.S. economy is improving, the central bank may have a tougher time balancing the conflicting monetary policy needs of a contracting, interest-rate sensitive housing market with stronger overall economic growth.

Indeed, June industrial production data is expected to show that manufacturing activity is picking up on improved business investment and resilient consumer spending. The markets will also look at the bevy of second-quarter earnings results due out to see how well corporate profits are holding up.

The emerging economic trends are sure to provoke monetary policy questions by lawmakers about the merits of interest rate hikes or cuts, but the mix of data over the next few weeks will most likely remain consistent with the Fed's current steady-as-she-goes policy.

Here's the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Empire State Index Tuesday, July 17 8:30 a.m. July 18.0 25.8
PPI Tuesday, July 17 8:30 a.m. June 0.2% 0.9%
PPI (ex-food & energy) Tuesday, July 17 8:30 a.m. June 0.2% 0.2%
Industrial Production Tuesday, July 17 9:15 a.m. June 0.4% 0.0%
Capacity Utilization Tuesday, July 17 9:15 a.m. June 81.4% 81.3%
CPI Wednesday, July 18 8:30 a.m. June 0.2% 0.7%
CPI (ex-food & energy) Wednesday, July 18 8:30 a.m. June 0.2% 0.1%
Housing Starts (million) Thursday, July 19 8:30 a.m. June 1.463 1.474
Leading Indicators Thursday, July 19 10 a.m. June 0.1% 0.3%
Philadelphia Fed Survey Thursday, July 19 12 p.m. July 14.0 18.0


The New York Federal Reserve Bank's Empire State Manufacturing Survey is expected to retreat in July, after an unexpected jump in the prior month. The general business conditions index vaulted to 25.8 in June, from 8 in May and 3.8 in April. The new orders and shipments indexes both zoomed higher. The employment-related indexes, however, deteriorated in June after gains in May.

Expectations for the coming six months did slip a little in June, with a reading of 44.1, from 49.8 in May and 33.9 in April. The May general business conditions index was at a 21-month high. Respondents were still pretty upbeat about new orders, although fewer saw gains in shipments, hiring, and capital spending in the coming months.


Tuesday, July 17, 7:45 a.m. EDT - Federal Reserve Bank of Kansas City President Thomas Hoenig speaks about the U.S. economy and monetary policy at a luncheon in North Platte, Neb.

ICSC-UBS STORE SALES - Tuesday, July 17, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended July 7. Sales edged up 0.1% for a second straight week, after falling 0.7% for the week ended June 23. The yearly pace of growth was 2.4%, from 2.5% for the week ended June 30.

JOHNSON REDBOOK INDEX- Tuesday, July 17, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of July, ended July 14. For the full month of June, sales were off 1.3% following an increase in sales of 2.1% for the entire month of May.

PRODUCER PRICE INDEX - Tuesday, July 17, 8:30 a.m. EDT

Producer prices are expected to rise at a slower pace after big jumps in the prior four months. Surging energy prices drove up the headline index 0.9% in May and 0.7% in April. Energy prices have risen by over 3% in each of the past four months. The energy driven increases pushed the yearly rate of wholesale prices up to 4.1% in April. Food prices, which had applied some upside pressure in the first quarter of the year, cooled down with a 0.2% fall in May.

Outside of the volatile energy and food categories, prices haven't risen by much. In May, core producer prices rose 0.2% after holding steady in each of the prior two months. On a yearly basis, core producer prices are up a much milder 1.6%.

INDUSTRIAL PRODUCTION - Tuesday, July 17, 9:15 a.m. EDT

Factory activity probably picked up a bit in June. Economists queried by Action Economics are expecting a 0.4% gain in production. The employment report showed the average workweek lengthened for factory workers. This figure is used by the Federal Reserve in calculating the monthly production data.

In April, total industrial production ground to a halt, as manufacturing activity rose just 0.1% and utility output dropped 1.3%. The May figures also showed downward revisions to April data. What's more, the yearly pace of production growth was 1.6%, the slowest gain since March of 2004.

After showing a rebound in March, production of business equipment has been steady. Economists will be looking closely at this number to gauge the strength of business investment.

Capacity utilization is expected to tick up to 81.4% in June, from 81.3% in May. Capacity growth is now outpacing production gains on a yearly basis.

HOME BUILDERS SURVEY - Tuesday, July 17, 1:00 p.m. EDT

The National Association of Home Builders and Wells Fargo bank will issue the July Housing Market Index. The index measures housing market conditions by surveying builders' on current sales, buyer traffic through model homes, and expectations for sales during the next six months. The index showed some signs of a rebound in the first quarter of 2007, but has since fallen off. The June reading dropped to 28, from 30 in May and 33 in April. The index hadn't been as low as the June level since early 1991. A reading below 50 indicates that more builders view conditions as poor than good.

All three components dropped in June. The index tracking current single-family home sales stood at 29, from 31 in May. Expectations for the coming six months dropped to 39 in May, from 41 the month before. Home builders also reported a reduction in buyer traffic.


Wednesday, July 18, 10 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke delivers the central bank's semi-annual testimony on the U.S. economy and monetary policy before the House Financial Services Committee in Washington, D.C.

MORTGAGE APPLICATIONS - Wednesday, July 18, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending July 13. In the week ended July 6, the purchase index climbed 3.8% to 453.9, from 437.3 in the prior week and 428.9 in the period ended June 22. The refi index fell for a fourth straight week to 1636.9 for the period ended July 6, from 1687.2 in the previous week.

The four-week moving average for the purchase index slowed to 442.8, from 445.4 in the week ended June 29. The four-week average for the refi index dropped to 1708.1 from 1762.6 for the period ended June 29. More weakness in application activity, especially in refinancing, can be expected.

The average 30-year fixed-rate mortgage jumped to 6.65% from 6.5% in the previous period.

CONSUMER PRICE INDEX - Wednesday, July 18, 8:30 a.m. EDT

Inflation probably slowed a little in June. The consumer price index probably rose 0.2% in June after posting increases of 0.4% or more in each of the past four months. The upswing in consumer prices was driven by higher energy prices and kept the yearly pace of inflation at or above 2.4%.

Energy prices were up 5.4% in May and 2.4% in April. Food prices are also putting some upward pressure on the headline index, with prices rising 0.3% in May and 3.9% from a year ago.

Inflation should continue to look tamer outside of food and energy. Core inflation ticked up 0.1% in May, following a 0.2% rise in April. The yearly pace of core inflation slowed to 2.2% in May from 2.7% back in February.

Within core inflation, economists will be keeping an eye on some recent hot spots including rents, education, and medical care. Owner's equivalent rent grew 0.1% in May and slowed to a yearly pace of 3.5%, from 4.3% back in January. To gauge the cost of housing, rental prices of properties are used. This caused the reading for housing costs to rise even as the housing market disintegrated, as greater demand for apartments raised rents. But now rent increases are starting to moderate as the supply of apartments has gone up.

NEW RESIDENTIAL CONSTRUCTION - Wednesday, July 18, 8:30 a.m. EDT

Housing starts probably eased a little more in June, after a drop in May. The annual pace of starts was 1.47 million in May, from 1.51 million in April. During the winter, housing starts and sales data bounced around a bit due to shifts in weather, but that's less likely to be a factor now. Therefore, the markets will likely view the latest results as giving a good picture of the housing market.

Economists will also pay a bit of attention to the housing permit figures. Permits are generally viewed as a leading indicator for starts. In May, authorizations bumped up to an annual pace of 1.5 million, from 1.46 million in April. However, builders are still holding a sizeable number of permits for projects that have yet to break ground. In the short term, this large stockpile could distort any relationship that permits and starts have.

On a yearly basis, the contraction in housing activity remains quite deep, but shows some signs of waning. In May, starts were off 24.2%, from 17.3% in April. Among housing permits, the May yearly decline was 20.6%, from 26.7% in April. The yearly drop in permits for May was the smallest since last July.

REAL EARNINGS - Wednesday, July 18, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably bounced higher in June. That's based on the consensus forecast of a 0.2% gain in the June consumer price index and a 0.6% jump in average weekly earnings. Real earnings eased 0.2% in May and 0.6% in April. Compared to the same period a year ago, however, inflation-adjusted earnings improved to 1.4%, from 0.8% in April.


Thursday, July 19, 9:30 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke continues the central bank's semi-annual testimony on the U.S. economy and monetary policy before the Senate Banking Committee in Washington, D.C.

9:30 a.m. EDT - Federal Reserve Bank of Chicago President Michael Moskow speaks at a Global Interdependence Center event in Philadelphia.

JOBLESS CLAIMS - Thursday, July 19, 8:30 a.m. EDT

Jobless claims for the week ended July 7 settled back down to 308,000, after popping up to a revised 320,000 for the week ended June 30. The original level for the previous week was 318,000. The four-week moving average fell to 317,750, from 319,250 in the week ended June 30. Continuing jobless claims for the week ended June 30 held at 2.55 million.

LEADING INDICATORS - Thursday, July 19, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators probably ticked up in June. The May index rebounded 0.3%, after an April slide of 0.3%.

On a yearly basis, the index was up 0.3% -- the first yearly gain since December of 2006. The May improvement was driven by fewer initial jobless claims and rising stock prices. A shorter work week among factory workers and the 5.25% federal funds rate above the 10-year Treasury rate limited the gain in May.

The June index will not get much support from stocks and initial claims could be a small drag, although the drag from interest rates will be smaller and factory workers saw their work week lengthen slightly in June as well.

PHILADELPHIA FED SURVEY - Thursday, July 19, 12 p.m. EDT

The Philadelphia Federal Reserve Bank's July factory activity index for the mid-Atlantic region probably moderated following a surprising surge in June. The general business activity index zoomed up to 18, from 4.2 in May, and 0.2 in both April and March. The latest result was the best since April 2005. There was also a big improvement in the new orders index, which jumped to 18.3, from 8.7 in May, and 2.8 in April. However, the shipments and employment indexes retreated, which calls into question whether the overall reading will remain at the June level.

What's more, respondents also were less optimistic about conditions in the coming six months. The general business activity index pulled back to 16.7, from 30.8 in May. Expectations for new orders and hiring slipped, while more manufacturers said they expect improvement in shipments and should ratchet up their capital spending.

FOMC MINUTES - Thursday, July 19, 2 p.m. EDT

The Federal Reserve will release the minutes of the two-day Open Market Committee meeting held on June 27-28. Investors and economists will look to see how strongly members of the FOMC feel about inflation pressures. Based on recent speeches made by Fed officials, there appears to be some differences in opinion about inflation risks.

The press release after the June meeting not only stated that the central bank's "predominant policy concern remains the risk that inflation will fail to moderate as expected," but also said "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." It does not appear that the central bank will budge from the current 5.25% fed funds rate and the chances of a rate cut seem to be getting even slimmer.

Earnings Calendar
Day Companies
Monday Eaton, Mattel, Novellus Systems, W.W. Grainger
Tuesday Coca Cola, CSX, Forest Laboratories, Intel, Johnson & Johnson, KeyCorp, Merrill Lynch, State Street, U.S. Bancorp, Wells Fargo, Yahoo
Wednesday Abbott Laboratories, Allstate, Altria Group, CIT Group, Comerica, eBay, Gannett, Host Hotels & Resorts, IMS Health, J.P. Morgan Chase, Johnson Controls, Juniper Networks, Marshall & Ilsley, Noble, Northern Trust, Pfizer, Southwest Airlines, Sovereign Bancorp, St. Jude Medical, Teradyne, Torchmark, United Technologies, Washington Mutual
Thursday Bank of America, Baxter International, BB&T, Broadcom, Capital One Financial, Cooper Industries, Danaher, Dow Jones & Co., Fifth Third Bancorp, First Data, First Horizon National, Genuine Parts, Gilead Sciences, Google, Harley-Davidson, Hershey, Union Pacific, Honeywell, Huntington Bancshares, Illinois Tool Works, International Game Technology, Leggett & Platt, MGIC Investment, Microsoft, Nucor, PNC Financial Services Group, Safeway, SanDisk, Sherwin-Williams, Stryker, SunTrust, Textron, Union Pacific, UnitedHealth Group, VF Corp., Wyeth , Xilinx, Zions Bancorp
Friday Caterpillar, Citigroup, Schlumberger, Wachovia