Consumer Prices Cool Boosting Market Optimism

This morning, the CPI rose 0.3% in April, a tenth of a percentage point less than expected and following a 0.4% gain in March. Year-over-year, consumer prices rose 3.4%, as expected according to the median forecast, and a downtick from the 3.5% annual increase in March.

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Food prices were flat (0.0%), while energy prices increased 1.1% in April following a similar gain in March. Excluding food and energy costs, the core CPI rose 0.3% in April, as expected and following a 0.4% increase the month prior. At 0.3%, this is the first time in six months the core CPI has cooled. Year-over-year, the core CPI increased 3.6%, a downtick from the 3.8% annual increase in March.

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In the details of the report, transportation prices rose 0.7%, despite a 0.4% decline in new vehicle prices and a 1.4% drop in used cars and trucks prices. Additionally, airline fares fell 0.8%, marking the second consecutive month of a decline. Shelter prices, meanwhile, rose 0.4% with a similar gain in the OER. Also, medical care prices climbed 0.4%, and other goods and services costs also rose 0.4% in April. Additionally, commodities prices increased 0.2% in April as did education and communication prices along with recreation prices.

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Another iteration of inflation, the supercore, defined as core services excluding housing, rose 0.4% in April and jumped 4.9% over the past 12 months, marking the largest annual gain in one year.

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Yesterday, the PPI rose 0.5% in April, surpassing the 0.3% gain expected and following a 0.1% decline the month prior (revised lower from a 0.2% increase). Year-over-year, producer prices rose 2.2% in April, up from the 1.8% gain in March and the largest annual increase in a year.

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Food prices dropped 0.7%, the largest monthly decline since May 2023, while energy prices rose 2.0% in April, the most in two months.

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Excluding food and energy costs, the core PPI rose 0.5%, surpassing the 0.2% rise expected and following a 0.1% decline in March (revised lower from a 0.2% increase). Year-over-year, the core PPI increased 2.4% in April, up from the 2.1% annual gain in March and the largest annual increase since August 2023.

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Additionally, goods costs rose 0.4% in April following a 0.2% decline the month prior. Services costs, meanwhile, gained 0.6%, due to a 0.8% rise in trade costs. Transportation and warehousing costs, however, dropped 0.6% at the start of the second quarter.

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Bottom Line: On the heels of another hot producer price report, a cooler-than-expected consumer price report has immediately eased concerns of rapidly rising inflation, fueling investors’ hopes for rate cuts in the coming months. Of course, rather than instilling confidence inflation is retreating course back to 2%, a still elevated level of consumer price growth underscores the volatile and uncertain nature of inflation, which will continue to complicate the policy pathway and keep the Fed sidelined for some time longer, potentially through the entirety of the year or at least until a clear and sustainable disinflationary trend has been (re)established.?

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Also this morning, retail sales were unexpectedly flat (0.0%) in April following a downwardly revised 0.6% gain in March. According to the median forecast, retail sales were expected to rise 0.4% at the start of the second quarter. Year-over-year, retail sales rose 3.0% in April, the smallest annual gain in two months.

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Car sales fell 0.8% in April following a 0.3% decrease the month prior, while gasoline stations sales increased 3.1% in April following a 2.1% increase in March. Excluding autos, retail sales rose 0.2% in April and climbed 3.6% over the past 12 months. Excluding autos and gasoline, retail sales fell 0.1% but increased 3.5% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales slipped 0.3% in April but rose 3.5% over the past 12 months.

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In the details of the report, clothing sales increased 1.6%, and electronics sales rose 1.5%. Also, food and beverage sales climbed 0.8%, building materials sales increased 0.5%, and eating and drinking sales rose 0.2% in April. On the other hand, general merchandise sales decreased 0.3%, despite a 0.5% gain in department store sales, miscellaneous sales declined 0.4%, and furniture sales fell 0.5% in April. Also, health and personal care sales declined 0.6%, sporting goods sales fell 0.9%, and non-store retailer sales dropped 1.2% at the start of the second quarter.

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Bottom Line: Consumers continue to shift the goods and services in their basket, resulting in tremendous volatility on a month-to-month basis as the average household increasingly feels the weight of higher prices and elevated borrowing costs. That being said, consumers are incredibly savvy, continuously finding alternative supports to help supplement their spending patterns and maintaining still a solid annual growth rate at 3%.

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Yesterday, Federal Reserve Chairman Jerome Powell spoke at an event organized by the Netherlands’ Foreign Bankers’ Association alongside ECB Governing Council member Klaas Knot. Powell reiterated the Fed’s ongoing message of patience as the latest inflation data showed ongoing upward pressure.?“The first quarter in the United States was notable for its lack of further progress on inflation,” Powell said. “We did not expect this to be a smooth road, but these were higher than I think anybody expected…What that has told us is that we’ll need to be patient and let restrictive policy do its work,” he added.

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Later this afternoon at noon ET, Minneapolis Fed President Neel Kashkari will speak in a fireside chat at the Williston Basin Petroleum Conference, and at 3:20 p.m. ET, Fed Governor Michelle Bowman will speak on innovation and the evolving financial landscape at the DC Blockchain Summit.

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Also yesterday, the NFIB Small Business Optimism Index unexpectedly ticked higher from 88.5 to 89.7 in April, a three-month high and the first increase this year. According to the median forecast, the index was expected to fall to 88.2. At 89.7, however, this is still well below the 2019, or pre-pandemic, average of 103.0. In the details of the report, 26% of firms plan to increase prices, the lowest number since April 2023. Additionally, the number of firms that indicated inflation was their top concern declined from 25% to 22%, albeit still near a one-year high.

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Additionally this morning, MBA mortgage applications rose 0.5% in the week ending May 10 following a 2.6% increase the week prior. The 30-year mortgage rate, however, fell 10bps from 7.18% to 7.08%, the lowest since the start of April.

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Also, business inventories fell 0.1% in March, as expected and following a 0.3% gain the month prior.

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Finally this morning, the NAHB Housing Market Index dropped six points to a reading of 45 in May, a four-month low. According to the median forecast, the housing market index was expected to only decline one point to a reading of 50 in May.

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Tomorrow, housing starts are expected to rise 7.5% in April following a 14.7% plunge in March, and building permits are expected to climb 0.9% in April following a 3.7% decline the month prior.

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Also tomorrow, the May Philly Fed Business Outlook Index, April import and export price indices, and industrial production and capacity utilization reports will be released.

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Later in the week, on Friday, the Leading Index is expected to decline 0.3% in April following a similar fall in March.

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-Lindsey Piegza, Ph.D., Chief Economist

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