Control Group Retail Sales Decline Modestly After Strong September, While Core Inflation Remains Sticky

Key Takeaways:

• Retail sales and food services rose 0.4 percent in October following an upwardly revised 0.8 percent gain in September, according to the Census Bureau. However, much of the gain was due to a 1.6 percent jump in sales at motor vehicle and parts dealers; retail sales excluding motor vehicle sales were flat over the month. Restaurant and bar sales were up 0.7 percent, continuing a strong streak over the past four months. Control group retail sales (excluding food service, auto, building supplies, and gas station sales) declined 0.1 percent but were revised upward in September from a 0.7 percent gain to a 1.2 percent increase.
• The Consumer Price Index (CPI) increased 0.2 percent over the month in October for the fourth consecutive month, according to the Bureau of Labor Statistics (BLS). Compared to a year ago, the CPI was up 2.6 percent. Food prices rose 0.2 percent and energy prices were flat compared to a month earlier. Excluding food and energy, core CPI rose 0.3 percent over the month and remained elevated at 3.3 percent compared to a year prior. Core goods prices were flat, while shelter prices, medical care services, and transportation services all increased by 0.4 percent. Compared to a year ago, shelter prices rose 4.9 percent, the same reading as in September.
• The Producer Price Index (PPI) increased 0.2 percent over the month and 2.4 percent compared to a year ago in October, according to the BLS. Core PPI (excluding food, energy, and trade services) increased 0.3 percent, the strongest gain since July. Compared to a year ago, the core PPI rose 3.5 percent, an acceleration of two-tenths compared to September.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 2.5 points to 102.7, its highest level since February 2022. On net, negative 5 percent of firms expect the economy to improve and negative 4 percent of firms expect real sales to be higher in the next six months, improvements of 7 and 5 percentage points, respectively. Thirty-one percent of firms reported raising worker compensation over the past three months, the lowest level since April 2021. Twenty-three percent of businesses reported that inflation was the single largest problem they were facing, the most selected answer.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in October, showed that 2.5 percent of loan officers reported tightening mortgage loan standards on net, a net increase of 4 percentage points. On net, negative 5 percent of loan officers reported stronger demand for residential mortgages, the highest level since the third quarter of 2021. On net, 0 percent of loan officers reported tightening credit standards for commercial and industrial loans to large and medium firms, the lowest percentage since the second quarter of 2022.

Forecast Impact:

The small decline in control group retail sales was more than offset by an upward revision to September’s data, which creates favorable base effects for strong consumption growth in the fourth quarter. We see this report as consistent with our forecast for a gradual slowing in consumption growth toward a long-run equilibrium rate following the robust, yet likely unsustainable, pace of consumption in Q3. Elsewhere, we consider the improvements in small business confidence and commercial and industrial lending conditions to also be consistent with our forecast for sustained economic growth moving forward.

Recent core inflation readings have been a bit higher than we had previously expected. While lagged shelter costs still account for 2.1 percentage points of the 3.3 percent annual core inflation rate, other core services are also likely elevated above a level that would be consistent with 2-percent inflation in the long run. While we continue to expect another 25-basis point rate cut at the Fed’s December meeting, we expect the pace of further cuts to slow in 2025.

Nathaniel Drake
Economic and Strategic Research Group
November 15, 2024

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