Weekly Economic Trends and Indicators
The Headline:
Two important data points on inflation were released last week. Last Wednesday, the Bureau of Labor Statistics (BLS) report that the Consumer Price Index (CPI) increased by a seasonally adjusted 0.4% in March. The unadjusted 12-month inflation rate of the CPI was 3.5%.
In a separate release on Thursday, the BLS reported that the Producer Price Index (PPI) for final demand increased by a seasonally adjusted 0.2% in March. This was somewhat better than the first two months of the year (0.6% and 0.4% in January and February, respectively). However, the 12-month inflation rate of the PPI increased slightly from 2.7% to 2.8%.
The Details:
According to the BLS, the main contributors to the rise in the CPI were shelter and gasoline, which together accounted for over half of the increase. Motor vehicle insurance, medical care, apparel and personal care also contributed to overall inflation and core inflation (less food and energy).
Over the last 12 months, food away from home, electricity, shelter and transportation services have been the largest contributors to inflation while food at home, gasoline, fuel oil, piped gas service and new and used cars and trucks have had relatively smaller increases in prices - and in some cases have seen price decreases.
The Context:
Most analysts expected a 0.3% increase in the CPI, so the market stumbled at the news with the 10-year yield rising above 4.5%. Inflation expectations are a key driver of bond yields, and some economists now predict that yields could keep rising toward 5% if the Fed keeps interest rates higher for longer. As other market rates move in sympathy with the 10-year yield, this will affect long-term investment financing for many firms.
This week will be important for resetting expectations as several Fed officials are scheduled to speak. As much as most people would like to see rate cuts, the truth is that GDP is still growing at a fairly good rate. As of last Friday, Atlanta Fed GDPNow model estimate is predicting 2.4% GDP growth in the first quarter, and the Blue Chip consensus is still over 2% growth. If GDP growth was expected to be heading down towards 1% or lower, a rate cut might be easier for even the inflation “hawks” to swallow, but that is not the case.
The “last mile” of inflation reduction was always expected to be the hardest. For technical reasons, shelter and insurance inflation are going to remain stubborn for a while. Still, the consensus at the Fed seems to be for rate cuts sometime before the end of the year, and many analysts have not given up on a summer rate cut, even though those chances decreased slightly this week.
Next week: Summary of recent commentary on economic conditions, interest rate policy, and recession likelihood
