This week, after the publication of our July issue of Thoughts on the Current Outlook, new inflation and consumer sentiment data was released. Headline inflation was reported at a 3.0% annual increase, lower than expected, helped significantly by lower food and energy prices. Core inflation was also lower than expected, but remained at a much higher level of 4.8% annual increase.

The University of Michigan Consumer Sentiment indices also showed a much more positive result, with both current conditions and expectations readings increasing significantly from June. While the reading is still low, the increase likely reflects optimism about employment prospects.

Neither of these reports change our expectation that so long as the labor market stays strong, so will consumer spending. And while we will make progress on inflation, the Fed will likely need to raise rates more to reach its goal of 2% inflation.