Inflation Slows from Q1 Pace but Remains Elevated as Retail Sales Slump in April

Key Takeaways:

• The Consumer Price Index (CPI) rose 0.3 percent in April, a deceleration compared to the prior two months, according to the Bureau of Labor Statistics (BLS). Compared to a year ago, prices were up 3.4 percent, a deceleration of one-tenth. Prices for food were flat over the month, while energy prices were up 1.1 percent due to a 2.8 percent increase in gasoline prices. Excluding food and energy, core CPI increased 0.3 percent over the month and 3.6 percent compared to a year ago, the slowest annual rate in three years. Core goods prices outright declined over the month, while core services inflation was up 0.4 percent, a deceleration compared to the monthly gains in the first quarter of the year. Rent and owners’ equivalent rent (OER) prices also increased 0.4 percent.
• The Producer Price Index (PPI) increased 0.5 percent in April but followed a downward revision to March’s data, which now shows a 0.1 percent decline rather than the previously reported 0.2 percent increase, according to the BLS. Compared to a year ago, the PPI was up 2.2 percent. Excluding food, energy, and trade services, core PPI increased 0.4 percent over the month and 3.1 percent compared to a year ago.
• Retail sales and food services were flat in April, according to the Census Bureau. Strong gains in sales at clothing and accessory stores (+1.6 percent) and a price-related 3.1 percent jump in gas station sales were offset by weak sales in non-store retailers (-1.2 percent) and motor vehicle and parts dealers (-0.8 percent). Restaurant and bar sales increased 0.2 percent. Control group retail sales (excluding auto, building supplies, and gas station sales) declined 0.3 percent and were revised downward modestly in March.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, was flat in April, according to the Federal Reserve Board. Manufacturing activity declined 0.3 percent and was revised downward in the prior month. Mining output declined 0.7 percent and utilities output jumped 2.9 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 1.2 points to 89.7 in April, its first increase since December. On net, negative 12 percent of firms expect their real sales to be higher in the next six months, an improvement of 6 percentage points. A net 25 percent of firms reported raising average selling prices, a decline of 3 percentage points. At a net 22 percent, inflation remained the most reported “most important” problem, though this was down 3 percentage points compared to March.
• Housing starts increased 5.7 percent to a seasonally adjusted annualized rate (SAAR) of 1.36 million in April, according to the Census Bureau. Single-family starts were down a modest 0.4 percent to a SAAR of 1.03 million, while multifamily starts rebounded 30.6 percent (following a 38.8 percent decline the month prior) to a SAAR of 329,000. Single-family permits fell 0.8 percent to a SAAR of 976,000, their third consecutive monthly decline, while multifamily permits declined 7.4 percent.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 6 points to 45 in May, its lowest level since January. The index for sales in the present declined 6 points to 51, while the index for sales over the next six months was down 9 points to 51. The index for the foot traffic of prospective buyers declined 4 points to 30.

Forecast Impact:

The April CPI report was in line with our expectations and is encouraging compared to the data received in the first quarter, though it’s clear that some underlying inflation remains sticky. Core services, for example, remained at a pace that is faster than what would be consistent with the Fed’s 2 percent inflation target but did slow to a 0.4 percent month-over-month gain from 0.5 percent in February and March and 0.7 percent in January. Additionally, the PPI report on its face looked to show accelerating inflationary pressures but under the hood was far more encouraging given the downward revisions to March’s data. We continue to expect inflation will drift downward as the year progresses but will remain sticky enough to prevent rate cuts before September.

Control group retail sales, which feed directly into the Bureau of Economic Analysis’s estimates for personal consumption, were weak in April. However, with Easter landing in March this year instead of April, and major spring sales also shifting forward a month, we think seasonal quirks may be understating this data somewhat. Still, this report presents some downside risk to our assumption that consumption growth will remain strong in Q2 due in part to better base effects from the first quarter.

The modest pullback in single-family starts was in line with our forecast. While the limited number of existing homes available for sale remains broadly supportive of new home construction and sales in the intermediate to long term, starts have outpaced new home sales in recent months. As such, we expect some near-term softening in starts in response to the relatively weaker sales pace, which would also align with the drop in home builder confidence in May.

Nathaniel Drake
Economic and Strategic Research Group
May 17, 2024

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