Persian Gulf Problems
CPI rose a full 0.1% in April as inflation was held in check largely due to a decline in gasoline prices. On Thursday, however, we got news that two oil tankers were attacked in the Strait of Hormuz, escalating fears of potential disruption in the supply of oil, and sending oil prices higher. So, we could see this put some upward pricing pressure on gasoline for the May CPI read. The annual increase fell to 2% from 2.1% last month, and is in line with the Fed’s 2% target.
Moral of the story: The biggest thing that seems to be driving inflation right now is rising rents, but aside from that we’re not really seeing any pressure on pricing and current levels are cause for no action from the Fed. However, if we see tariff costs start flowing through to consumers or any sort of resurgence in energy prices, CPI could inflect upward.
Rebounding Retail Sales
After April’s less-than-ideal retail sales numbers, the May retail sales report actually revised the April numbers upward to a gain of 0.3% instead of the originally reported 0.2% loss. May retail sales, albeit slightly lower than expectations, rose by 0.5% with strength across the board. As the “Amazon effect” continues, this report showed strength in non-store retail sales coupled with declines in department stores and clothing.
Moral of the story: Retail sales haven’t shown a clear trend so far this year, making it difficult to draw conclusions about the underlying strength. Consumer spending was a weakness for first quarter GDP growth, but economists are already calling for a 4% gain for the second quarter compared to the 1.3% number we saw in in the first quarter.
Cooling Off, Heating Up
Industrial production increased by 0.4% in May, which is the strongest read we’ve seen in six months. The gains were across consumer goods, business equipment, non-industrial supplies, but the largest gains came through in utilities driven by air-conditioners (obviously seasonally driven aka temporary).
Moral of the story: The manufacturing sector continues to be fairly volatile and has been showing signs of weakness ever since the trade tensions first began. Industrial production is up only 2% since this time last year. But this month’s industrial production report, similar to the retail sales report, isn’t totally dismal and doesn’t incrementally add pressure on the Fed to take immediate action.