We received a lot of economic news this week, folks!
The March Consumer Price Index (CPI) and Producer Price Index (PPI) readings and March retail sales reports were released on Wednesday, Thursday and Friday, respectively. While the retail sales report left much to be desired, the CPI and PPI delivered positive news about inflation.
So, in today’s Markey 360, let’s review these economic reports. Then, I’ll share what these reports mean for the Federal Reserve.
This Week’s Three Economic Reports
Here’s what we learned from this week’s reports…
Consumer Price Index (CPI)
Headline CPI increased 5% year-over-year and 0.1% in March. Economists had anticipated CPI to rise 0.4% month-over-month and 6% year-over-year. Core CPI, which excludes food and energy, rose 5.6% year-over-year and 0.4% in March. Core CPI was expected to increase 0.5% month-over-month and 5.5% year-over-year. So, CPI was below economists’ expectations, while core CPI was in line with economists’ estimates.
Additionally, the Owners’ Equivalent Rent (OER) finally cracked. It declined from 0.8% in February to 0.6% in March. However, housing costs rose 8.2% in the past year. Now, housing costs account for one-third of the CPI, so it is important for that number to decrease.
I should note that energy prices fell 3.5% in March, mostly due to low natural gas prices. Now, natural gas has everything to do with the weather. In the natural gas business, you want a very cold winter and a very hot summer, especially in heavy metropolitan areas. The West Coast has been colder than normal this year, while New York has been warmer. So, natural gas prices fell.
Overall, the headline CPI was great, but the core CPI rate remains stubbornly high; so, until OER comes down, consumer inflation will persist.
Producer Price Index (PPI)
PPI declined 0.5% in March and is up 2.7% in the past 12 months, which is down significantly from 4.9% in February. Last March, PPI rose 1.6%. This is also the largest monthly drop in the PPI in three years. The annual rate is now running at the slowest pace in over two years. Core PPI, which excludes food, energy and trade margins, rose 0.1% in March and 3.6% in the past 12 months. This is down from a 4.5% annual pace in February.
Part of the reason behind the sharp decline in PPI was the drop in energy prices, with gas prices falling 11.7% in March.
I should add that wholesale service costs declined 0.3% in March. This is very good news, as this metric has also been stubbornly high in previous months. The reality is wholesale service costs were a large part of the inflation problem, so you really can’t have a better inflation report than this.
March Retail Sales
While the CPI and PPI reports were good news, the March retail sales report was the complete opposite. In short, it was a disaster.
Retail sales declined 1% in March, its fourth drop in the past five months. Economists had projected March retail sales to fall 0.4%. Excluding automobiles and parts, retail sales slipped 0.8%.
Based on the weak March retail sales report, it’s clear that when the Federal Reserve hiked key interest rates, which hurt the real estate industry, it also caused the U.S. consumer to spend less on big-ticket items. When folks stop buying houses, then they stop buying other items like furniture, appliances, building materials and garden supplies.
So, what exactly does this week’s batch of economic data mean for the Fed?
Before I can answer that question, we need to discuss the March Federal Open Market Committee (FOMC) meeting minutes first.
What the Economic Reports Mean for the Fed
The March FOMC meeting minutes showed that there are some doves in the Fed who are questioning the interest rate hikes. In fact, a significant minority of FOMC members did not want to raise key interest rates due to banking turmoil. These FOMC minutes also revealed that Fed staffers predicted a “mild recession” later this year. Overall, these FOMC minutes revealed that a minority of FOMC members are dovish.
The bottom line is that cooling inflation on both the consumer and wholesale levels, as well as the weak March retail sales report, means that the Fed has done a good job squeezing the economy and does not need to raise key interest rates any further.
Wall Street seems to have come to a similar conclusion this week, as the S&P 500 and Dow climbed higher – as did the majority of my Growth Investor stocks.
Looking forward, I expect my Growth Investor companies to continue to post gains as we head into first-quarter announcement season because of their superior fundamentals.
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Sincerely,
Louis Navellier
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