Inflation-Dependent

Yesterday, the PPI rose 0.2% in March, slightly less than the 0.3% gain rise expected and following a 0.6% rise the month prior. Year-over-year, producer prices rose 2.1% in March, up from the 1.6% gain in February and the largest annual increase in nearly a year.

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Food prices rose 0.8% following a 1.1% gain the month prior, while energy prices dropped 1.6% in March, the largest monthly decline since November. Excluding food and energy costs, the core PPI rose 0.2%, as expected and following a 0.3% gain in February. Year-over-year, the core PPI increased 2.4% in March, up from the 2.1% annual gain in February and the largest annual increase since August 2023.

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The hotter-than-expected read on producer prices follows a similar upward movement in consumer prices. On Wednesday, the CPI rose 0.4% in March, a tenth of a percentage point more than expected and following a 0.4% gain in February. Year-over-year, consumer prices rose 3.5%, slightly more than the 3.4% annual increase expected according to the median forecast, and the largest annual gain since September.

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Food prices rose 0.1%, while energy prices increased 1.1% in March following a 2.3% gain in February. Excluding food and energy costs, the core CPI rose 0.4% in March, topping the 0.3% gain expected and following a 0.4% increase the month prior. Year-over-year, the core CPI increased 3.8% for the second consecutive month. According to the median forecast, the CPI was expected to rise 3.7% at the end of Q1.

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Another iteration of inflation, the supercore, defined as core services excluding housing, rose 0.7% in March, a two-month high, and jumped 4.8% over the past 12 months, the largest annual gain since April 2023.

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Bottom Line: Another hotter-than-expected inflation report further complicates the policy pathway for officials clearly anxious to cut rates. While market participants have been eager to dismiss an earlier backup in price pressures as an anomaly or temporary disruption, three months of acceleration is increasingly more difficult to ignore, particularly with the headline moving average now on the rise.?

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With the Fed hyper-focused on achieving a soft landing, the Committee was hesitant to raise rates unnecessarily high. However, with inflation still far from the 2% target and now trending in the wrong direction, there is a growing concern the Fed did not raise rates to a sufficiently restrictive level to ensure a return to price stability. As we’ve written ad nauseam, the risk was never that the Fed raises rates too high, as the Fed can quickly reverse course as needed. The biggest risk has always been that the Fed doesn’t – or didn’t – raise rates high enough to break inflation, allowing price pressures to become embedded into the economy.

Meanwhile, overseas, the European Central Bank (ECB) appears to be increasingly inching towards rate cuts near term. While keeping its deposit rate steady for the fifth consecutive meeting, ECB President Christine Lagarde said at least a “few” members of the ECB's Governing Council were ready to cut rates at yesterday’s meeting. The majority, however, said like the Fed, they need further confidence in the inflation data before adjusting policy.?The ECB is "data-dependent, not Fed-dependent" she said.?

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Also yesterday, initial jobless claims declined from 221k to 211k in the week ending April 6, a five-week low. The four-week average, meanwhile, fell slightly from 215k to 214k. Continuing claims, or the total number of Americans claiming ongoing unemployment, however, climbed from 1.79M to 1.82M in the week ending March 30.

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This morning, import prices rose 0.4% in March, a tenth of a percentage point more than expected, while export prices increased 0.3%, as expected. Much of the rise, however, in import prices was attributed to rise in petroleum. Excluding petroleum, import prices were flat (0.0%). Over the past 12 months, import prices rose 0.4%, the first annual gain since January 2023, while export prices dropped 1.4%, the 14th consecutive month of decline.

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Later this morning, the preliminary April University of Michigan Consumer Sentiment Index is expected to decline slightly from 79.4 to 79.0.

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Next week, the economic calendar begins on Monday with a look at the April Empire Manufacturing Index, March business inventories, and more importantly, an updated look at the consumer with March retail sales.

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Retail sales rose 0.6% in February, falling short of the 0.8% gain expected, albeit a welcome gain following a 1.1% drop in January. Over the past 12 months, retail sales rose 1.5% in February, the most in two months. In March, retail sales are expected to rise 0.4% and 3.2% year-over-year, potentially marking the largest annual gain since December.

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Also on Monday, the NAHB Housing Market Index, ahead of the March starts and permits data on Tuesday. Last month, starts jumped nearly 11% in February and rose 5.9% year-over-year. Building permits, meanwhile, increased just shy of 2% in February and 2.4% over the past 12 months, the weakest annual gain in four months. This month, starts are expected to decline 2.7% in March, but rise 7.3% on an annual basis, while permits are expected to decline 0.3% in March and increase 5.8% year-over-year.

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Later in the week, on Wednesday, weekly mortgage applications will be released.

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On Thursday, weekly jobless claims, along with the Philly Fed Business Outlook Index, and the March Leading Index. Also, we have more housing data with March existing home sales. Last month, existing home sales unexpectedly jumped 9.5% to a 4.4M unit pace, the highest level in a year. Year-over-year, however, existing home sales fell 3.3% in February, the weakest annual pace in two months and marking the 31st consecutive month of decline. This month, existing home sales are expected to extend that decline, dropping 5.1% in March to a 4.16M unit pace, potentially declining 4.4% year-over-year.?

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Finally, on Friday, the economic calendar is empty.

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On the heels of a surprising uptick in inflation this week, next week there are a number of Fed officials slated to take the stage including Dallas Fed President Lorie Logan, San Francisco Fed President Mary Daly, Governor Bowman, and Atlanta’s Bostic. Investors will be anxious to hear any indications of a change in expectations for rates given the recent backup in price pressures. Finally, also from the Fed, on Wednesday, the latest Beige Book will be released.?

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-Lindsey Piegza, Ph.D., Chief Economist

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