Inflation coming in hot
Consumer price inflation (CPI), which measure the cost of a basket of goods (including energy and housing) increased 4.2% in April compared to the year earlier. This is significantly higher than the 3.6% increase that was broadly expected and marks the largest jump in inflation in over 12 years. Excluding food and energy (which tend to be the most volatile components of CPI), core CPI still increased 3%, compared to the 2.3% increase expected.
Moral of the story: The Fed’s inflation target is 2%, so more than double that figure is a big number. We knew inflation numbers were going to be big, but the magnitude of this month’s print was a surprise. It was partly driven by growing off a really low base – April 2020 inflation was pretty much 0%. Prices for commodities (lumber, copper, gas, etc.) have been increasing at a pretty meaningful clip. The consensus is still that this inflation is transitory, let’s hope the data continue to support that theory as time goes on.
Consumer sentiment
The level of inflation is starting to weigh on consumer sentiment, which fell to 82.8 in May from 88.3 the prior month as measured by the consumer sentiment survey. The expectation was for consumer sentiment to actually increase to 90.4 given the recent stimulus checks and pace of vaccine rollout across the country, so the decline in this measure is an unfortunate surprise.
Moral of the story: The rapid increase in prices for commodities (lumber, copper, gas, etc.) has been insanely noticeable, gas even more so with the Colonial Pipeline issue this week – for those who live paycheck to paycheck, that increase is meaningful. Unfortunately, the fear of additional price increases causes consumers to stock up at today’s prices, which drives demand higher today and leads to additional price increases, creating a vicious cycle. Hopefully wage inflation and the labor market recovery can keep up.
Retail sales taking a pause
The recovery in retail sales came to an unexpected pause in April, unchanged from March, which had marked a 10.7% increase. Core retail sales (excluding gas, cars, building materials, and food services) actually decreased 1.5% compared to March. March benefitted from the boost of stimulus checks so it creates a higher base to grow from, though the sudden pause is not great to see.
Moral of the story: Core retail sales are closely correlated with consumer spending, which accounts for more than two-thirds of the US economic growth. Though growth in retail sales took a pause in April, the expectation is for the recovery to continue as fueled by the reopening and the record consumer savings rate today. Fingers crossed.