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US retail sales accelerate even as consumers remain gloomy

Kathleen Stephansen, CBE

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Mortgage applications rose 1.9% w/w (3.3% y/y) in the week ending July 17, following a decline of 2.7% (+2.2%) in the week ending July 10, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house rose 5.5% w/w (0.4% y/y) in the latest week, after declining 7.3% w/w (-1.5% y/y) in the July 10 week. Applications for loan refinancing declined 2.4% w/w (+7.3% y/y) in the week ending July 17, after rising 3.5% w/w (7.3% y/y) in the July 10 week.

The effective interest rate on a 30-year fixed-rate loan rose 2bps to 6.87% in the week ending July 17 from 6.85% in the week ending July 10. The rate on 15-year fixed-rate mortgages edged down 1bp to 6.26% in the July 17 week from 6.27% in the July 10 week. The 30-year Jumbo rate dropped 20bps to 6.57% in the latest week from 6.77% in the July 10 week. The rate on a 5-year ARM rose 29bps to 6.38% in the July 17 week from 6.09% in the July 10 week.

The share of applications for refinancing an existing loan declined to 41.2% of total applications in the week of July 17 from 43.2% in the July 10 week. The adjustable-rate mortgage (ARM) share of activity rose to 7.7% in the July 17 week from 7.1% in the July 10 week.

The average size of a mortgage rose 1.1% w/w (3.2% y/y) to $383,700 in the week ending July 17, after declining 3.1% w/w (+1.1% y/y) to $379,500 in the week ending July 10. The average size of a purchase loan edged up 0.4% w/w (4.0% y/y) to $443,800 in the latest week, after declining 2.0% w/w to $442,200 in the July 10 week. The average size of a loan to refinance a mortgage edged up 0.2% w/w (3.5% y/y) to $297,900 in the week ending July 17, after declining 2.4% w/w to $297,200 in the July 10 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Applications for loans to purchase rose in the latest week, while applications for loan refinancing declined.
- Interest rate on 30-year fixed-rate loans rose 2bps to 6.87%. 
- Average loan size rose.

U.S. Mortgage Applications Rose in the July 17 Week

Robert Brusca

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Inflation progress in the U.K. continues to make its way despite a month-to-month increase in the pace for the HICP measure, as well as for the CPIH headline and its core. The two headline measures for the CPIH and the HICP accelerated in June to 0.2% after each posted a small 0.1% increase in May. The CPIH core, which excludes energy, food, alcohol, and tobacco, advanced by 0.3% in June after rising by 0.2% in May.

**Monthly data are ‘noisy’:** These are minor and technical month-to-month changes since we're measuring inflation in tenths; this is an increase in the smallest unit that we present. If we look at the inflation progress over broader periods of three months, six months, and 12 months, we find there are ongoing decelerations of inflation in the HICP, the CPIH, and the CPIH core measures. I will continue this discussion solely in terms of the CPIH measures.

**Sequential inflation**: Headline inflation for the CPIH clocks 2.8% over 12 months; the annualized rate falls to 2.6% over six months and falls further to 1.8% annualized over three months, a clear pattern of progress. Core inflation on the CPIH gauge is also 2.8% over 12 months; it also falls to 2.6% over six months, but its deceleration over three months is to a pace of 2.3% (instead of 1.8% for the headline). Still, that's ongoing progress and the three-month 2.3% pace of core inflation is getting quite close to the Bank of England’s 2% objective.

**Component behavior**: We're going to further evaluate inflation by looking at how the components behave over different periods. In June, inflation accelerated in 66.7% of the categories. In May, it accelerated in 58.3% of the categories, whereas in April, it accelerated in only 50% of the categories. Inflation acceleration is going in the wrong direction to appease monetary authorities. However, these are calculations made across categories without taking any weighting into account. The headline performance takes weighting into account; the weighted core and the headlines are moving in the right direction.

Sequentially, on this broader basis, trends look better. Over 12 months compared to 12 months earlier, inflation is accelerating in only 33.3% of the categories, but then over six months compared to 12 months, the inflation rate is increasing in half of the categories. Over three months, that diffusion measure falls to 41.7%; i.e., only 41.7% of the categories are experiencing accelerating inflation over three months compared to six months. So, these are much better trends when viewed over a broader period. To bring a little bit more life into these abstract diffusion figures, I've also presented the median and average pace of inflation over three months, six months, and 12 months at the bottom of the table. There you can see that the median pace of inflation on this sequence is 3.5% over 12 months and six months, and then it falls to 3% over three months. The average pace of inflation over 12 months is 3.5%; it stays at 3.5% over six months and then decelerates to 2.9% over three months.

**Ranking 12-month inflation rates**: The final column ranks the current inflation rates across categories and for the headlines on data back to 2000. The HICP measure has a 62.9 percentile standing, the CPIH measure has a 72.5 percentile standing, while this CPIH core has a 79.6 percentile standing. These standings tell us that the inflation rates for these categories are high relative to where they have been since 2000. At the bottom of the table, we can see that the median inflation rate since 2000 has been 2.2%, while the average pace of inflation has been 2.5%. So, over the full, back-to-2000 span, inflation has been slightly north of the BOE target, depending on which measure we look at, the median or the average. The median pace has been quite close, while the average has been half a percentage point too high. A current ranking that puts the inflation rates above their respective medians (and a ranking of 50 represents the median) evaluated the individual category as above its own median at a time when the median and averages overall were already too hot. For all but three of these categories, inflation is still high by a historic experience (above a ranking of 50%). That probably continues to require a somewhat restrictive interest rate from the central bank. Across categories, the highest-ranking inflation is a 91.1 percentile standing for communication, followed by an 84-percentile standing for restaurants & hotels and standings in the 79th percentile for transportation as well as for the core CPI taken as a whole. Inflation rates below their medians for the period back to 2000 are for food & nonalcoholic beverages, furniture, household equipment & maintenance, and healthcare.

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**Summing up**: Inflation clearly is trending in the right direction; it's getting close to where the Bank of England would like to see it. Interest rates are still restrictive; therefore, the BOE may decide to roll the dice at its next meeting and keep interest rates where they are. It's possible that under these conditions the Monetary Policy Committee (MPC) could vote to cut rates because inflation is falling to a within target or close to target pace over three months, although it's clearly still excessive over six months and 12 months. The rankings that we present in the far-right column pertain to year-over-year inflation rates only. In any event, there is authentic signaling about a weakening in the inflation process, and evidence of inflation progress comes as the economy has been weak and that's coincidentally with the introduction of a new Prime Minister who has just been installed. Marking time by the central bank would be a reasonable strategy. Cutting rates would be a bit bolder; it's not out of the question since, at 3.75%, the policy rate is above current measures of inflation and already restrictive, and would continue to be restrictive after a small rate cut.

United Kingdom

U.K. Headline and Core Inflation Rates Slow Sequentially as BOE Gets Ready to Meet

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The ZEW survey, assessing the opinions of German financial experts for July, showed continuing weak but improving conditions in the euro area, Germany, and the United States, with a slight step back in China. Economic expectations improved month-to-month for Germany and China, while posting a slight setback in the United States. Inflation expectations weakened month-to-month sharply and significantly across the board in all four economic units. Short-term interest rates are broadly expected to fall, while long-term interest rates are also expected to ease, with the exception of China, where some small increases are anticipated. Stock markets are showing weaker performance, with moderate step backs across all four areas.

The average of the percentile standings for the four economic units surveyed is a standing in the 44th percentile. That average reflects China as the only survey member above its median observation. Germany has the lowest reading at a 17.8 percentile standing. Next, economic expectations have a 44-percentile average as Germany is the only one above its 50th percentile mark, putting it above its median. The U.S. and China show weaker level standings around their respective 40th percentiles. Inflation expectations have a midstream ranking at their 47th percentile, below their historic medians, with China above its historic median, Germany very close to its historic median, and the euro area and the U.S. posting more moderate standings. Short-term rate expectations have an average standing in their 68th percentile; all of the readings are above their 50th percentile mark, marginally so for the U.S. but more substantially for China and the euro area. Long-rate expectations have a 46.4 percentile average standing, with China well above its median on a ranking above the 50th percentile and with rankings between the 35th and 40th percentiles for Germany and the U.S. Stock market expectations average a 36.9 percentile standing for the four economic units, with the U.S. and China above their 50th percentile mark and the euro area and Germany, substantially weaker.

Most notably, inflation expectations fell sharply in July across the board. But that was probably earlier in the month and reflected a belief that the U.S.-Iran ceasefire would hold. Now that is largely reversed as the hot war is back in Iran. So, we will expect to see backtracking in this survey next month. Of course, that means that the interest rate portion of the survey might also be in for a rehash. That will be something to watch for.

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ZEW Shows Mixed Gains in July

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The German PPI excluding construction fell by 0.3% in June following three months of increases. Sequentially, the PPI is accelerating, with a 1.8% rise over 12 months, a gain at a 4.3% annual rate over six months, and a gain at a 4.8% annual rate over three months. They are joined by PPI excluding energy index, which also shows an accelerating pattern, rising 2.4% over 12 months, at a 4.4% annual rate over six months, and then at a 6.4% annual rate over three months.

The inflation picture for in June is fine if you restrict your view to the headline, where it dropped by 0.3%. However, the PPI excluding energy rose by 0.3% in June after rising by 0.7% in May and by 0.5% in April, definitely a string of unruly increases for producer prices in Germany.

**Sector trends**: The sector inflation metrics are not seasonally adjusted; as a result, a sequential trend may not be as reliable. On the other hand, when data aren't seasonally adjusted, it's often because the statistical authorities haven't detected stable patterns of seasonality and so they present the data as not seasonally adjusted. Let’s look at the sector trends, NSA. For consumer goods, prices fall by 1.7% over 12 months, followed by a 0.2% annualized fall over six months and at a 0.3% annual drop over three months. The pattern is not particularly reassuring as the pace of decline is waning sequentially, although consumer goods are producing declines and showing price weakness. Investment goods, on the other hand, show prices steadily expanding, by 2.1% over 12 months, by 3.2% annually over six months but then stepping back slightly toward a 2.4% annual gain over three months. Not surprisingly, the inflation fire is really cooking under intermediate goods, where raw materials have a bigger role. Intermediate goods prices are up by 5.1% over 12 months; unadjusted prices are up at a 10.9% annual rate over six months and then at a 13.8% annual rate over three months. This is clearly the source of the price pressure in the PPI.

**Energy prices**: Energy prices are only part of the problem, however, and we can see in the energy prices at the bottom of the table that they are producing some strange and unstable price trends. Brent oil prices measured in euros fell 17% month-to-month in June after rising by 0.8% in May and by 1.6% in April. Sequentially, Brent prices are up by 20.2% over 12 months and up at a 94.1% annual rate over six months, but then they fall to a 47.6% annual rate over three months. Against that background, prices in the second quarter compared to the first quarter show an increase at a 141.3% annual rate. These metrics explain why it's hard to pin down the oil-price impact on the PPI. The quarter-to-quarter changes are enormous, the three-month change is extremely weak, but that follows an extraordinary annualized gain over six months, and in June alone oil prices fell sharply by 17%. It is hard to keep track of the oil-price passthrough cycle. So, we're going to have to wait for these trends to sort themselves out to get a better fix on the impact of oil and energy prices. However, we know that the recent good news on oil has since been rescinded as the Strait of Hormuz, which was briefly open, is shut again and the U.S. and Iran have scrapped their fledgling ceasefire agreement.

**Euro area—what matters**: Policy in the euro area is made based upon inflation for the whole union, not just for Germany, but it pays closer attention to the CPI than the PPI. Germany is still the largest economy in the monetary union, and its CPI is up 2.3% over 12 months, up at a 2.5% annual rate over six months, and rising at a 0.3% annual rate over three months. The CPI excluding energy for Germany is considerably more stable, up by 2.3% over 12 months and then rising at a 2% annual rate over both six months and three months. German ex-energy CPI prices appear to be calm, with inflation arrested; however, we can't say the same thing for the PPI ex-energy, with the inflation rate in a clear accelerating mode.

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With the Strait of Hormuz closed again, we will be looking at the impact of higher energy prices on inflation in the local economies. The ECB will be meeting this week; it is not expected to change rates. However, it started to raise rates at its previous meeting while it forged ahead not waiting for the U.S. to start the next cycle. Having had a brief hiatus from rising oil prices because of the short closure of the Strait and the relief that it brought in June may be enough to keep the ECB on the sidelines for a meeting. But looking farther ahead, there is still a great deal of geopolitical conflict with Ukraine showing an ability to reach and bomb Russian oil facilities as well as some of its more important commercial sites. The U.S. has gone back to bombing Iran, focusing more on its infrastructure and threatening to some of its power supplies. Iran has shown some unexpected teeth, unleashing missile attacks on fellow Arab countries in the Middle East rather than aiming at Israel; Iran has struck at a U.S. base in Jordan. After thinking that the U.S. had defanged Iran, it continues to launch missiles and now appears to have missiles that are faster and more evasive than those used earlier, raising the question of where Iran is getting help from and perhaps also how that help is getting into the country. It is unclear what the next move will be in the Middle East.

Germany

German PPI Shows Pressure but Backs Off in June

Tian Yong Woon

In this week's Letter, we examine China's increasingly two-speed economy, where robust AI-driven exports mask faltering domestic demand and a stalled rebalancing. Q2 GDP growth slowed to 4.3% y/y from 4.8%, dragging the year-to-date (ytd) rate towards the lower bound of its 4.5% to 5% target (chart 1). Beneath the headline, a two-speed split has widened, with external-oriented sectors holding up while more inward-focused prints such as retail sales and fixed asset investment weaken (chart 2). 

Exports have kept climbing even as rebalancing stalls, with the export share of GDP rising to about 21% and consumption stuck near 40% (chart 3). With consumption hard to lift, tilting away from exports would sacrifice China's main growth driver, making rebalancing a difficult path. That export strength owes much to the AI boom, as integrated circuits added nearly 6.5 ppts to June's 27% y/y growth (chart 4). Part of the surge, though, likely reflects importer front-loading ahead of expected tariff hikes and the coming holiday seasons. Domestically, however, growth in retail sales had floundered, dragged down by autos, furniture and appliances, while trade-in subsidies likely delivered only one-off, front-loaded gains (chart 5). All while a fragile consumer climate, unsettled by the ongoing property crisis, continues to hold spending back. That crisis runs deep, with property price declines now into a fifth year and no clear bottom in sight (chart 6). 

**China’s Q2 GDP**
China's Q2 GDP results disappointed when posted last week, with growth slowing to 4.3% y/y from Q1's 4.8%. That drop dragged the y/y ytd growth rate towards the lower bound of the 4.5% to 5% target for the year (chart 1). The reading followed a run of soft monthly data, leaving investors increasingly concerned about domestic growth. Even so, China continues to benefit from more robust growth in its externally oriented sectors. This increasingly two-speed dynamic, alongside a persistent lack of economic rebalancing, remains a concern for investors. It has left them looking to Chinese authorities for signs of fresh stimulus to keep the economy on track for its full-year target. We return to these themes in later sections.

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**China’s two-speed economy**
China's two-speed economy is captured in chart 2, where externally oriented sectors have held up comparatively well. They are proxied here by data for export-heavy industrial production growth. The inward, domestically oriented readings of retail sales and fixed asset investment have fared markedly worse. Retail sales growth deteriorated to the point of posting declines in May this year, despite multiple rounds of government-led incentives to spur consumption. On fixed asset investment, y/y ytd figures have sat in negative territory for months. That followed only a brief period of growth earlier this year. It underscores how weak investment flows have become, largely hit by China's protracted property slump.

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Exports and related sectors have continued to enjoy robust growth, helped in part by strong demand for AI-related goods, even as domestically oriented sectors falter. Rebalancing towards consumption was a resurgent initiative touted by authorities last year. Instead, China's export share of nominal GDP rose again in 2025, to about 21% (chart 3). The share of residential consumption, meanwhile, has been broadly unchanged at 40%. However, China's gross capital formation share of GDP has continued its downward trend, to about 39%. Against that backdrop, rebalancing looks hard to pursue now, especially if consumption growth cannot be reliably and sustainably boosted. Without that support, the burden of adjustment falls on exports. Paring them back would sacrifice the main growth driver, with little ready to replace it.

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**China’s exports**
Delving deeper into exports, chart 4 shows how far the current AI boom has driven China's recent export growth. Integrated circuits accounted for only about 7% of China's goods exports over the past 12 months. Yet these goods, central to the global AI buildout, have contributed in outsized fashion to export growth in recent months. In June, they added nearly 6.5 percentage points to China's 27% y/y export growth. Other notable contributors include automatic data processing machines and parts, and motor vehicles. Part of the recent surge, however, also likely reflects importer front-loading, ahead of expected tariff hikes on China and the approaching holiday seasons. Even so, with this boom in place, exports have become just about the only significant growth driver China can lean on, amid a faltering domestic economy.

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**China’s domestic sector**
On the flip side, more domestically oriented sectors, captured by prints such as retail sales, have been floundering. Digging beneath the headline, chart 5 shows that the recent lacklustre performance has been dragged down by a few select sectors. Chief among them are automobiles, furniture and household appliances. These slumps have come in spite of recent government measures to spur consumption, such as trade-in subsidies. Admittedly, measures like these likely delivered only one-off effects, front-loading demand from the outset. That payback can be seen in this year's numbers. Also weighing on retail sales is a fragile consumer climate, unsettled in part by China's ongoing property crisis. That crisis, among other factors, continues to hold consumers back from spending more freely.

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Turning to the property market, chart 6 shows that China's price declines have now stretched into a fifth year, with a bottom still too unclear to call. The dampening effects have fed through to other figures, running from wealth effects on consumer sentiment and spending to weaker demand for new residential building, which in turn drags on construction-related investment and employment. In a way, though, this painful and gradual unravelling is arguably what the market needs, shifting the sector away from its speculative past. There have been some signs that the bulk of the pain may have passed, such as smaller price declines, though these remain disparate across cities and unevenly spread. So while there have been city-specific measures to stem further fallout, nationwide stimulus to revive the sector looks unlikely for now.

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Asia

Economic Letter from Asia: Two Speed Ahead

Winnie Tapasanun

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Industrial production (IP) edged up a slightly less-than-expected 0.1% m/m in June, the fourth monthly gain in five months, following a 0.1% increase in May (unrevised) and a downwardly revised 0.8% rise in April (+0.9% previously), according to data from the Federal Reserve Board. A 0.2% m/m June increase had been expected in the Action Economics Forecast Survey. The year-on-year rate decelerated to 1.1% in June, the lowest since March, from 1.7% in May (0.7% in June 2025). The June IP index at 102.6 was 3.3% above a low of 99.3 in November 2024 and 3.4% above a low of 99.2 in January 2024. IP rose 1.0% q/q in Q2 2026 after a 0.3% q/q rebound in Q1 2026, rising at a 4.0% annualized rate following a 1.1% Q1’26 annualized pace.

By **industry groups**, manufacturing production was virtually unchanged m/m (+1.1% y/y) in June after increases of 0.1% in May (0.0% initially) and 0.7% in April (unrevised). Durable goods production dipped 0.1% (+3.2% y/y) in June, the first m/m easing since March, following a 1.0% rise in May. Within durables, most categories fell m/m in June, led by a 0.8% drop (-1.1% y/y) in wood products, followed by declines of 0.7% (+2.9% y/y) in machinery, 0.6% (+5.7% y/y) in electrical equipment, appliances & components, 0.6% (+3.3% y/y) in nonmetallic mineral products, 0.2% (+5.0% y/y) in aerospace & miscellaneous transportation equipment, 0.2% (+2.1% y/y) in fabricated metal products, and 0.2% (+1.9% y/y) in miscellaneous durable goods. To the upside, the following durable goods categories rose m/m in June, including output rises of 0.7% (1.2% y/y) in motor vehicles & parts, 0.3% (-5.0% y/y) in furniture & related products, 0.2% (1.5% y/y) in primary metals, and 0.1% (9.2% y/y) in computer & electronic products. Notably, aircraft & parts production climbed 0.3% (9.1% y/y), the fifth straight m/m rise, after a 1.0% May increase.

Nondurable goods production rose 0.2% (-1.1% y/y) in June, the fourth m/m gain in five months, following a 0.9% decrease in May. The June output rise was led by a 2.1% rebound (-0.9% y/y) in petroleum & coal products, followed by increases of 1.9% (2.1% y/y) in apparel & leather goods, 0.4% (-1.9% y/y) in printing & related support activities, 0.1% (-0.7% y/y) in food, beverages & tobacco, and 0.1% (0.7% y/y) in plastics & rubber products. To the downside, the following nondurable goods categories fell m/m in June, including output declines of 0.4% (-4.6% y/y) in paper, 0.3% (-4.7% y/y) in textiles & product mills, and 0.2% (-1.3% y/y) in chemicals.

Mining activity grew 0.4% (2.4% y/y) in June, the third successive m/m gain and the fourth in five months, after a 1.1% increase in May (+1.3% initially). Utilities output, up for the second time in three months, rose 0.4% (0.3% y/y) following a 0.7% May decline (-0.4% initially), reflecting a 0.9% rebound (1.3% y/y) in electric utilities output and a 3.3% decline (-6.7% y/y) in natural gas utilities output.

By **market groups**, consumer goods output rebounded 0.3% (-1.2% y/y) in June after a 0.6% decline in May, reflecting gains of 0.4% (-0.9% y/y) in durable consumer goods and 0.3% (-1.2% y/y) in nondurable consumer goods. Materials production inched up 0.1% (1.3% y/y), the fourth m/m increase in five months, after a 0.3% May rise. In contrast, business equipment output fell 0.4% (+5.4% y/y), the first m/m fall since March, following a 0.9% May gain. Construction supplies production slid 0.4% (+1.5% y/y), the second m/m decline in three months, after a 1.0% May increase.

In **special classifications**, factory output of selected high-tech industries rose 0.5% (11.0% y/y) in June on top of a 1.8% advance in May, marking the third consecutive m/m gain and the eighth in nine months. Manufacturing production excluding selected high-tech industries held steady m/m (+0.8% y/y) in June after four straight m/m gains, while manufacturing production excluding selected high-tech and motor vehicles & parts dipped 0.1% (+0.8% y/y) for the second successive month.

Capacity utilization held at 76.1% for the third consecutive month in June (with May’s reading revised down from 76.2%). The Action Economics Forecast Survey forecasted 76.2%. The June reading was 3.3 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization slipped to 75.7% in June from an upwardly revised 75.8% in May (the highest since September 2025; 75.7% initially). The June rate was 2.5 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- June IP +0.1% (+1.1% y/y), fourth m/m increase in five months.
- Manufacturing unchanged (+1.1% y/y), w/ durables -0.1% and nondurables +0.2%.
- Selected high-tech +0.5%, eighth gain in nine mths.; motor vehicles +0.7%, sixth rise in seven mths.
- Mining +0.4% (+2.4% y/y), third consecutive m/m increase.
- Utilities +0.4% (+0.3% y/y), led by a 0.9% rebound in electric utilities output.
- Key categories in market groups post mixed results.
- Capacity utilization steady at 76.1%; mfg. capacity utilization marginally down to 75.7%.

U.S. Industrial Production Up Slightly in June; Manufacturing Flat

Michael J. Moran

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Total housing starts jumped 19.0% in June, but the sharp advance was less impressive than it might appear. The increase reflected a striking gain of 76.2% in the multi-family sector, but the surge followed a soft month in May. Moreover, single-family building lost a bit of ground (off 0.2%).

The increase in multi-family starts was the fourth largest in the history of the series (data available from 1959). The change involved a large dose of random volatility, as it followed a drop of 39.6% in the prior month, which pushed the level of multi-family starts to the low end of the recent range. Still, the surge in June moved multi-family starts to the upper end of the range from the current cycle and reinforced the upward trend in multi-family activity.

The dip in single-family starts occurred from upwardly revised readings in both April and May (1.7% firmer than previously believed in both months). The revisions, although notable, were not strong enough to have a marked influence on the generally soft performance in the single-family sector. After trending lower during most of 2024 and 2025, single-family building has changed modestly in recent months. The upward revision in April and May gave an upward bump to single-family starts, but the underlying trend is still close to flat.

Building permits are less volatile than starts, and the higher degree of stability usually provides a clearer view of underlying trends. Overall, permits drifted lower during 2024 and 2025 before inching up in the first half of this year. The upward nudge in 2026 primarily reflects planned activity in multi-family building; single-family permits have been tracing a largely sideways trend (charts below).

In general, the housing sector has been soft in the past few years. Activity slowed noticeably in 2022 and 2023 in response to higher interest rates. (Mortgage rates rose from the neighborhood of 3.0% in 2021 to a peak of more than 8.0% in late 2023.) With higher interest rates generating affordability challenges, residential construction has constrained GDP growth in most recent quarters (negative contributions to GDP growth in 12 of the past 17 quarters; an average drag of 0.2 percentage point).

The housing starts and permits figures can be found in Haver’s **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Multi-Family starts rebounded from a soft reading in May.
- Single-family activity dipped from upwardly revised levels; softish trend overall.

June Housing Starts: Contrasting Movements in Multi-Family and Single-Family

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**Inflation in EMU**
The recent inflation data in the European Monetary Union is emblematic of the kind of issues that central banks typically have to deal with. Casual central bank observers think of central banks as “leaning against the wind,” meaning that they raise rates when inflation is high and then cut rates when the economy gets weak. Indeed, this is largely what central banks do. However, they also try to be anticipatory when they can, seeking to get ahead of surges in inflation and periods when the economy is going to weaken. It's very hard to forecast those shifts in the best of circumstances, and so a great deal of the judgment that central banks form comes from the near-term trends, even though central banks are aware that the most recent data can also be some of the most volatile and prone to revision. With these sorts of caveats, we look at the recent inflation data from the European Monetary Union, and we see less than straightforward trends.

At its last meeting, the European Central Bank got out in front of events and started raising rates ahead of any action by the Federal Reserve. In June, its year-over-year HICP and core HICP rates both decelerated compared to their May values, with the headline easing to 2.8% from 3.2% and the core to 2.4% from 2.6%. Having inflation rates move in the opposite direction of policy, even in the short run, can create rough sledding for a central bank that is, in any event, trying to look at the broader trend rather than the most recent wiggle in the inflation rate. 

**The good, the bad, and the unexpected**
If we go back to December, we see the HICP in the monetary union at 2%, followed by 1.7% in January and 1.9% in February. At that point, things seemed to be well in hand. The problem was that the core inflation rate in December was 2.3%; while it fell to 2.2% in January, it popped back up to 2.4% in February. So, February was one of those uncomfortable months where both the headline and core rates were popping up, but the headline rate was still below the 2% target that the ECB seeks to attain. After February, of course, the world changed; the war in Iran spiked up oil prices and that's when inflation rate in the monetary union rose to 2.6% in March, 3% in April, and 3.2% in May. June inflation has backed down from those higher rates of change; however, conditions in the Middle East that had prompted some release of air from the inflation balloon in June have reversed, and so, the outlook once again is for oil prices to remain high and for inflation to remain troublesome.

**Inflation still percolates**
At the bottom of the table, I show the percentage of categories with inflation accelerating over three months, and since February, that percentage is over 50% in each month. The percentage of categories with inflation accelerating over six months strings out to three months in a row. The decision by the ECB to raise rates is entirely understandable given these trends. In addition, and perhaps less tethered to any particular monetary rule, included in the right-hand column, the inflation ranking in June is compared to data back to the year 2001, a roughly 25-year period. Over this timeline, the headline HICP ranks in the 83rd percentile and the core rate in the 82nd percentile. In both cases, we're looking at inflation being higher only 17% or 18% of the time during this span, which once again marks this as a strong inflation period.

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**Haunted by their legacy**
In addition, central banks are coming off a period where they had missed their inflation targets quite a lot. While the ECB had been able to land its inflation rate inside its target zone for a while, the Federal Reserve has not been able to accomplish that at all; the Bank of England is still struggling with that, and the Bank of Japan, after dueling with deflation, now has an excess of inflation. Globally, there is this environment that's looking a lot more fundamentally inflationary rather than disinflationary and certainly not deflationary, thanks to oil and war. 

**Complex circumstances but a clear objective**
Central banks certainly have to set their policies for their own domestic conditions, but global conditions do matter. The war or warlike conditions continue in Ukraine and Iran. Although the United States and Israel were able to deal Iran a potentially crippling blow to its nuclear operations, Iran tenaciously clings to its ambition to eventually nuclearize and it has added to that a claim to control traffic at the Strait of Hormuz, which most countries find to be unacceptable and which is also in violation of international law. At the same time, Ukraine has been able to penetrate Russian defenses to make strikes deep into Russia against Russian energy resources, so the war in Ukraine is going a lot better for the Ukrainians, although it also is putting the energy sector under greater peril and pressure. These days circumstances are so complicated that sometimes even good news can play out as bad news. One might think that after the evisceration that Iran got in the hands of the United States and Israel, it would be more contrite. But it has not and has only hardened its resistance. Iran is using its advantage over a peculiar piece of geography in the Strait of Hormuz to try to become a global power despite having been stripped of almost all of its military might. As it turns out, the Strait of Hormuz is so delicate that it doesn't take much for Iran to be able to create a good deal of chaos with tanker traffic using missiles, drones, and mines. All of this makes the inflation outlook so much harder to pin down. Monetary policy should not require central bankers to be military strategists, but we have, in some sense, been relegated to that sort of situation.

Europe

HICP Detail in EMU Shows Inflation Lurking

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Sales of new homes rose 1.6% in June, and results in the prior three months were revised upward by a combined 2.8%. The results were favorable when viewed in isolation, but they still left the performance so far this year lagging that in the prior three years. Annual sales from 2023 to 2025 averaged 676,000 units; the average annual rate so far this year has totaled 626,000 (chart, upper left).

Not only are results this year lagging those of the prior three years, but they are light relative to the experience in the 1990s (a period not affected by the inflating and bursting of a housing bubble, and one not influenced by a pandemic). New home sales in the latter portion of that decade topped 800,000. With the number of households now much larger than at that time (133 million versus approximately 100 million), one might expect current sales to be at least as firm as in that earlier period.

Developments in the existing home market also would lead one to expect strong results in the new home market. Many homeowners with low-rate mortgages have postponed or cancelled plans to move in order to retain their attractive financing. This has led to a dearth of existing homes for sale and pushed activity to a dreadfully low level – the lowest since the trough that followed the bursting of the housing bubble (chart, upper right). Aspiring homeowners could turn to the new home market to satisfy their demand, but uninspiring sales of new homes suggest that such shifts have not been pronounced.

The supply of new homes on the market does not seem to be a factor in restraining activity, as the number of homes for sale is in the upper reaches of the historical experience. The number of listings at the peak of the housing bubble in 2006 was notably larger, but otherwise, observations in the past year exceed previous results by a sizeable margin (chart, lower left). The months’ supply of homes (the length of time to clear inventory at the current sales pace) also is in the upper portion of its historical range.

Soft demand seems to explain recent results, with affordability being the key consideration. The housing affordability index published by the National Association of Realtors has moved to the low portion of its historical range. Indeed, the only time with lower readings was in the late 1970s and 1980s, when double-digit mortgage rates pushed the measure to its record low (chart, lower right). With housing costs joining other financial challenges (health care, child care, education), housing activity is lacking vigor.

New home sales are recorded when the sales contract is signed. New home sales activity and prices are available in Haver's **USECON** database. The consensus expectation figure from Action Economics is available in the **AS1REPNA** database.

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- Respectable advance in the latest month…
- …and net upward revisions in the prior three months
- …but still trailing results in the prior three months

New Home Sales: Improvement in June, but a Still-Soft Performance

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