Welcome back to our economic webinar series.

My name is Natalie Gallagher, principal economist for board,

and today we're going to talk about the latest inflation

release and how our team of economists is triangulating

that information to inform the most likely trajectory

in the US economy.

Now I'm gonna focus on why,

although the headline number

of 2.7% seemed quite optimistic, quite positive,

actually gonna make a case for why the underlying dynamics

were troubling from an economic lens.

Now, to really get into the heart of this,

when we look at headline versus core inflation, we see

that core CPI came in at 3.1% year over year,

and that was well above consensus expectations,

or I should say above consensus expectations.

Now most importantly,

we're really seeing a fundamental shift in inflation

dynamics that are reshaping the economic environment ahead.

Now, let me start with one of the most concerning components

of the inflation release, which is the services component.

Now, services isn't talked about as often, um, likely

because it's not top of mind the same way

that tariff induced price pressures

on goods are top of mind.

But what we saw in the underlying data was a bit concerning.

When we look at the year over year numbers, we see

that services inflation actually held steady at 3.8%.

But the real story is in the month over month

percent change movements.

So what we did see was transportation medical services

accelerated significantly.

Shelter also accelerated on a monthly basis as well.

Now, inflation and services in general,

it's not really driven by tariffs, it's more driven

by domestic demand

that really drives growth in these sectors.

So the persistent here suggests that businesses are

maintaining pricing power in the services sector.

Well, that's sort of a positive in one hand

because it tells us that consumer demand has hasn't softened

to a point where companies aren't able to sort

of pass on price increases.

It's a bit of a headwind when we look at the overall

trajectory for inflation

as we get into the second half of the year.

Now, this is further exacerbated when we look at sticky

price inflation, right?

So sticky price inflation,

what this metric actually looks at is it looks at the price

in the price changes in goods

and services that change infrequently.

So that gives us a barometer for categories

that show inflation persistence

and sticky price inflation has accelerated from 3.2% in

May to 3.4% in July.

Now, while this isn't too much of a re-acceleration,

what I really wanna hone in on is that it's the reversal

of a disinflation trend that have been going strong

for 18 months.

Now this measure is really critical

because it reflects the prices that are sort of the hardest

for monetary policy to influence,

and it's really indicative

of entrenched inflation expectations.

Now, this persistence in sticky price inflation really gives

us a signal that the depth

and the breadth of inflation we are observing is quite

problematic as we make our way into the second half

of the year, especially with a federal reserve

that is really paying close attention

to the underlying movements if um, if we take a beat, right,

if we step away from services inflation,

take a look at goods inflation.

We see some concerning trends here as well.

So this is especially prominent in durable goods inflation.

The goods disinflation

that helped keep overall inflation in check

appears to be ending, right?

And this is really apparent in durable goods when we saw

categories like vehicles

and household furnishings jump from deflation to inflation.

And this really seems to mark the beginning of goods

reflation, but the tariff impact is

still building through the system.

So from an economic perspective, we see we seem

to be in sort of the later stages

of a quote unquote inventory depletion phase

as businesses continue to work

through their p pre tariff stock.

So we really saw businesses load up on stock in Q1, right?

That impacted the overall GDP numbers.

Now we're really seeing the continued sort of depletion of

that stock as we make our way through the year.

This implies that the brunt, the brunt

of the price pressures will continue to manifest

as restocking occurs at tariff inclusive pricing.

Now, the timing here is really, really critical, right?

Because we not only have sticky services inflation

that is suboptimal,

but we also have on the horizon starting at a sort

of a critical inflection point goods reflation, right?

So what this tells us is that as we make our way

through the next several months, we're in a situation

where there are quite a lot of headwinds

to inflation coming back down to

that 2% federal rate target.

Now, that brings us to what this means

for monetary policy, right?

Because it creates a really tricky environment

for the Federal Reserve.

Um, now from a purely economic perspective,

rates seem unlikely in September given all of this movement

that we've already talked about with services inflation,

with goods inflation, and sort of the anticipation

that especially on the goods inflation side of the house,

is going to sort of continue as tariff.

Um, as tariff inclusive prices are passed on to consumers.

Now, the underlying data shows

that persistent momentum from monetary policy struggles are

or from monetary policy is really gonna struggle

to be addressed quickly

and looking at this trajectory that have

before you of the federal funds rate cut expectations

alongside anticipated inflation

and really see that our forecast has remained unchanged

and that the Fed is likely to hold rates in September.

Now, what would it take for that to shift?

It would take a significant deterioration in the labor

market evidenced in the next data release.

So that's the first week of September, we'd likely need

to see unemployment tick up towards 4.5% really sharp

increase that tells us that the labor market is

significantly deteriorating and needs automatic

or um, immediate intervention, I should say.

Now, over the last eight months,

we've really been entering a fundamentally different

economic paradigm, and the economic reality has really

profound implications for how businesses need

to operate moving forward to continue to be adaptable

and agile in this environment.

And, you know, we're gonna talk about a few steps

that businesses can absolutely take in order

to protect themselves

and remain as, as profitable as possible in sort

of the economic volatility that we do see on the horizon

or sort of continuing throughout the rest of 2025.

Now, what this means for businesses is, first

and foremost, operational efficiency is for paramount

as we continue to make our way through 2025.

Now, with persistent inflation

and more restrictive monetary policy,

leaders can't really rely on just favorable

economic conditions to solve margin pressure.

So we need to focus on productivity investments, automation,

um, you know, competitors who really optimize operations.

Now they are at a significant advantage

as this economic cycle continues to unfold.

Second supply chain strategies, they really need

to shift from cost optimization to resiliency, right?

The goods replacement cycle absolutely appears

to be beginning and inventory

strategies need to recalibrate.

So in some instances, this might look like carrying slightly

higher stock levels in, in, um,

in the immediate term instead

of restocking at elevated prices in Q4.

Since we do see sort

of inflation continuing on an upward trajectory

as we make our way through the later half of this year.

Third, financial planning must assume a

sustained rate environment, right?

I absolutely, we absolutely do not believe

that a rate cut is a given in September.

It's not a given in 2025 in general.

And this is gonna affect everything from capital allocation

to acquisition financing.

So the immediate term, a good place

to start is in reviewing Q4 procurement strategies,

stress testing budgets for sustained 3% plus core inflation,

really preparing scenario plans

for continued economic volatility.

You know, just to, just to take it all back

to the bottom line, we're in a much different economic

environment than we were this time last year

where we could sort of rely on a more accommodative stance

or we could infer a more accommodative monetary stance was

coming with continued

disinflation as we got through the year.

And so what we do as business leaders is going to need

to be adaptable and agile as we continue to make our way

through the year and as this economic,

Um, as this economic cycle continues to unfold.

Now, if you are interested in learning

how board can help you do this,

we do have two products at your disposal

that's gonna be board signals and board foresight.

And if you are interested in hearing more about this,

feel free to visit board.com and request a demo

or reach out to anybody at board

who I know will be more than happy to walk you

through either of those products.

And with that, I just wanna say as always,

it was an absolute pleasure

and I look forward to touching base

with you again next month.