Waiting for Confidence

On the heels of a hotter- than-expected PPI report, yesterday’s cooler-than-expected CPI report was a welcome reprieve from the consistent upward momentum in price pressures since the start of the year. Still, it is one month of data that is neither consistent with achieving 2% in the near term nor even yet convincing that inflation is back on a sustainable pathway towards 2% in the medium term. It was a step in the right direction, but many more steps are needed before the Fed has the confidence or justification to adjust the current stance of policy.?

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Echoing the need for patience and speaking in the aftermath of?the April CPI release, yesterday, as if to drive this point home, New York Fed President John Williams noted there is no evidence yet in his mind pressing for a reduction in rates. “I don’t see any indicators now telling me, oh, that there’s a reason to change the stance of monetary policy now.” Furthermore, he said, “I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term.”

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Recall, yesterday, 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%) and rose 2.2% over the past 12 months, while energy prices increased 1.1% in April following a similar gain in March. From this time last year, energy prices rose 2.6%. 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% in April and 3.5% on an annual basis, despite a 0.4% decline in new vehicle prices and a 1.4% drop in used cars and trucks prices in April. 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. Over the past 12 months, shelter prices rose 5.5%. Also, medical care prices climbed 0.4% in April and 2.6% year-over-year, and other goods and services costs also rose 0.4% in April. Additionally, commodities prices increased 0.2% in April and 0.3% on an annual basis, and education and communication prices rose 0.2% in April and 0.4% on an annual basis. Meanwhile, recreation prices gained 0.2% in April and 1.5% over the past 12 months.

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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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Meanwhile, on Tuesday, 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: 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 yesterday, retail sales came in softer than expected, exacerbating the celebratory response to a weaker consumer price report. 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% in April and 1.3%, 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 maintain?still a solid annual growth rate at 3%.

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Meanwhile, the Atlanta Fed GDPNow model revised down its growth forecast for Q2 from 4.2% to 3.8% in expectation for a slightly weaker consumer.

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Additionally yesterday, 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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The Empire Manufacturing Index unexpectedly dropped from a reading of -14.3 to a reading of -15.6 in May, a two-month low and the sixth consecutive month of a negative print. According to the median forecast, the index was expected to rise to -10.0. In the details of the report, prices paid slipped 5.4 points to 28.3, while prices received decreased from 16.9 to 14.1 in May, a four-month low. Additionally, new orders ticked lower from -16.2 reading of -16.5, the number of employees decreased by 1.3 points to -6.4, averaging -5.7 over the past six months, and inventories dropped from +3.4 to +2.0. The six-month general business conditions index, meanwhile, declined from 16.7 to 14.5 in May, a five-month low.

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Finally, yesterday, 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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This morning, housing starts rose 5.7% in April, pulling the annual pace up from 1.29M to 1.36M, a two-month high. Starts were expected to rise 7.5%, according to the median forecast on Bloomberg. Single family starts declined 0.4%, while multi-family starts jumped 30.6%. Year-over-year, housing starts fell 0.6% in April following a 4.1% annual drop in March.

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Building permits, on the other hand, unexpectedly fell 3.0% in April, pulling the annual pace down from 1.49M to 1.44M, the lowest since December 2022. Building permits were expected to increase 0.9% at the start of Q2, according to Bloomberg. Single family permits fell 0.8% and multi-family permits dropped 7.4% in April. Year-over-year, building permits fell 2.0% in April, the third consecutive annual decline.

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Also this morning, initial jobless claims fell 10k to 222k in the week ending May 11, a two-week low. The four-week average, however, ticked higher from 215k to 218k. Continuing claims, or the total number of Americans claiming ongoing unemployment, rose from 1.78M to 1.79M in the week ending May 4.

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In addition, this morning, the Philly Fed Business Outlook Index dropped from 15.5 to a reading of 4.5 in May, a two-month low. In the details of the report, prices paid declined from 23.0 to 18.7, a two-month low and averaging 16.3 over the past six months, while prices received moved up 1.1 points to a reading of 6.6, a five-month high. Also, the number of employees inched higher from -10.7 to -7.9 in May, albeit still marking the seventh consecutive month in negative territory, and new orders dropped from 12.2 to -7.9 in May, the lowest reading in four months.

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Additionally this morning, import prices rose 0.9% in April, surpassing the 0.3% increase expected and marking the largest monthly gain since March 2022. Export prices, meanwhile, rose 0.5% in April, a two-month high and surpassing the 0.2% gain expected. Over the past 12 months, import prices rose 1.1%, while export prices declined 1.0% at the start of Q2.

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Finally this morning, industrial production was flat (0.0%) in April, falling short of the 0.1% gain expected and a three-month low. Meanwhile, capacity utilization inched lower from 78.5% to 78.4% in April, as expected.

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Tomorrow, 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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