Weekly Economic Trends and Indicators

The Headline:

According to the Bureau of Labor Statistics (BLS), the Consumer Price Index for All Urban Consumers (CPI) increased by 0.4% on a seasonally adjusted basis in April. Seasonally unadjusted inflation over the last twelve months was 4.9%. Also this week, the BLS reported that the Producer Price Index for final demand increased by 0.2% on a seasonally adjusted basis for the month. Seasonally unadjusted inflation for producer prices over the last twelve months was 2.3%. These numbers were slightly better than expected, giving markets some hope that the Federal Reserve could pause the interest rate increases.

The Details:

Core CPI inflation (excluding food and energy), rose at the same 0.4% last month and was slightly higher than overall inflation for the last twelve months at 5.5%. Energy commodities such as gasoline and fuel oil had spiked in early 2022 with the Russian invasion of Ukraine and have been falling toward their previous levels over the last twelve months. Food prices have also moderated recently, remaining essentially stable for the last two months following several months of rapid increases.

While food and energy prices have fallen recently, core inflation remains stubborn. Because housing prices make up such a large portion of core inflation, the recent gains in home values have been part of the reason. However, as expectations are for a cooling housing market in 2023, this will help keep inflation moving in the right direction.

The Context:

Last week, we considered whether the Federal Reserve could pause the series of interest rate increases if there is evidence that inflation is being brought under control. Is this enough?

Immediately after the release of the CPI data, the financial markets responded positively, with most analysts believing that this news was good enough to warrant a pause by the Fed. However, as the week closed, the pendulum had swung back the other way, but only slightly. The CME FedWatch tool reported on Friday that the probability of a pause in June was 82.3%, down from 89.3% the day before, and down from 91.5% the previous Friday (May 5, in the wake of the jobs report). The fact that core inflation remains above 5% and expectations of inflation are not falling are keeping future rate increases on the table.

Perhaps more troubling was Friday’s news from the University of Michigan Survey of Consumers that consumer sentiment decreased by 9% from April to May. It may be that the interest rate increases, stubborn inflation, cooling housing market, possible credit crunch, and debate over the government debt ceiling are taking a toll on the consumer. A pause by the Fed is still most likely, but not guaranteed. With about a month before the next Fed meeting, we have plenty of data still to come.

Next week: April inflation update