Inflation Is Down. But Consumers Aren’t Out of the Woods Yet

The Consumer Price Index (CPI) increased 3.4% year over year in July. Meanwhile, the core CPI, which excludes food and energy costs, rose 2.5%. Both measures fell slightly month over month. They also matched market expectations and suggested that inflationary pressures could be moderating.

A recent Marcus & Millichap report supported that possibility, noting that despite continued turmoil in the Middle East and its potential impact on supply chains, the latest readings could “modestly ease immediate pressure on the Federal Reserve to raise interest rates.”

Rent Growth Continues Muted

Housing remains one of the largest contributors to the core CPI, with the Owners’ Equivalent Rent (OER) accounting for much of the metric. Also counted are apartment rents. These increased by 1.3%, compared with the 2.1% increase the year before.

At the same time, real average hourly earnings declined 0.1%. This suggests that consumers’ purchasing power remains under pressure even as inflation moderates.

Consumer Spending Faces Headwinds

Food prices continued to climb in July, with year-over-year grocery and restaurant prices increasing by 2.7% and 3.4%, respectively.

“Although this divergence may suggest consumers remain willing to spend on discretionary dining, it may also signal vulnerability if household purchasing power weakens further,” Marcus & Millichap said.

Retail property fundamentals were mixed. Vacancy remains 60 basis points below its historical average, as space demand remains volatile. Net space relinquishment occurred in three of the past six quarters.

The report suggested that retailers are working in a resilient consumer environment but are selective about spending.

Hospitality Could Feel the Pressure

Leisure spending is under pressure, too. The Leisure and Hospitality sector lost 40,000 jobs nationally in July, while hotel occupancy declined 20 basis points in June despite World Cup travel demand.

“With transportation costs still elevated and travel demand showing signs of moderation, hotel performance could face additional headwinds through year-end,” Marcus & Millichap said.

Marcus & Millichap said that that the consumer economy isn’t yet out of the woods. While cooling inflation could give the Federal Reserve more room to maneuver, ongoing cost increases for housing, dining, transportation and travel continue to exert pressure on household budgets.