Sigh of relief

Market concerns about inflation ebb and flow, but last week brought renewed focus. Following higher-than-expected readings in both the New York Federal Reserve and the University of Michigan consumer surveys, producer (wholesale) inflation rose more than expected in April, sending Treasury prices into a tailspin on expectations of higher consumer prices. But on further inspection, the PPI report looked less bad, as March prices were revised lower, so markets recovered. 

Markets breathed a sigh of relief on the softer than feared April consumer price inflation report. The report was in-line with expectations, as both monthly and annual inflation fell. The cost of renting and owning a home both rose 0.4% but lodging away from home fell 0.2%. New and used car prices both fell, as did airfares, but vehicle insurance costs rose 1.8%, taking their increase to 22.6% over the last year. Further helping the slowing inflation narrative is that the breadth of price increases by CPI component continues to normalize, well below the mid-2022 peak and almost back to 2019, pre-pandemic levels. These smaller puzzle pieces help to confirm the Federal Reserve’s view that inflation is moving in the right direction, but more time will be needed before rate cuts.

April retail sales were weaker than expected, showing no gain, after gains in February and March were revised lower by a combined 0.4%. Most of April’s weakness was in the two largest segments of the report, motor vehicles and non-store retailers, but weakness was broad-based. Retail sales tend to bounce around quite a bit—they have been negative on average 3-4 months each year over the last 10 years—but their direction bears watching. As long as the labor market continues to add jobs, consumers will likely feel comfortable enough to spend, and their spending powers economic growth. Last week’s very low weekly jobless claims report did nothing to alter the view that the labor markets remain strong. The Fed’s goal is steady economic growth with full employment and low inflation. It has taken longer than expected to get there, but the Fed seems confident that it is on the right path.