Weekly Economic Trends and Indicators

The Headlines:

The Consumer Price Index (CPI) rose at a seasonally adjusted annual rate of 0.2% in February according to the Bureau of Labor Statistics (BLS). This was the lowest monthly rate of CPI inflation since October. The CPI inflation rate over the last twelve months was 2.8%.

The BLS also reported that the Producer Price Index (PPI) for final demand was unchanged in February as the 0.3% increase in producer prices for goods was balanced by a 0.2% decline in producer prices for services. (Services weigh more heavily in the index.) This was the lowest monthly rate of inflation in the PPI since July.

The University of Michigan Index of Consumer Sentiment decreased from 63.2 to 57.9, a 10.5% decrease. The survey also asks consumers about their expectations of inflation over the next year and five years. One-year-ahead inflation expectations rose from 4.3% in February to 4.9% in March. Five-year-ahead inflation expectations rose from 3.5% in February to 3.9% in March.

The Details:

Headline inflation numbers for February were better than expected and the best we have seen in several months. Digging into the details reveals mostly good news with prices coming down in many categories across the board including food and energy as well as new vehicles, auto parts, household goods, and airline fares. Some price declines may reflect falling consumer demand.

Putting this together with the benign PPI data reveals a much better inflation picture compared to last month. Yet consumers surveyed by the University of Michigan were not feeling any better about the prospects for the months and years ahead. Survey respondents noted uncertainty concerning economic policy as being one of the reasons for the diminished outlook.

While the increase in inflation expectations is at odds with the latest data, consumers surveyed this month may have been responding to the more negative data from December and January as well as the widely reported concerns about potential inflationary effects from tariffs.

The Context:

As discussed last week, a number of indicators point to a slowing economy. Whether the consumers surveyed by the University of Michigan are responding to those indicators or simply the noise generated by tariff announcements which, for a time, were changing on a nearly daily basis is not yet clear. However, anecdotal evidence from corporate earnings reports this quarter have raised concerns about the strength of consumer spending going forward.

The Federal Reserve is expected to leave the fed funds target rate unchanged at their meeting on Wednesday, and expectations for future rate cuts changed very little over the last few days. Economic fundamentals remain mostly good, but the strength of the consumer is the wildcard. A drop in consumer spending for any reason would create a significant challenge.

Next week: Fastest growing sectors in the Quad Cities economy