The Independent Market Observer

Monday Update: Consumer Inflation Accelerates in May

Posted by Sam Millette

This entry was posted on Jun 13, 2022 10:11:54 AM

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Monday UpdateThere were several important economic data releases last week, with a focus on the May Consumer Price Index report. Consumer prices increased more than expected during the month, as inflation continues to affect all areas of the economy. This will be another busy week of updates, with reports scheduled on producer prices, retail sales, the Fed’s June meeting, and new home construction.

Last Week’s News

We started the week with Tuesday’s release of the international trade report for April. The trade deficit narrowed notably during the month after reaching a record level in March. The report showed that the trade deficit fell from $107.7 billion in March to $87.1 billion in April against calls for a more modest drop to $89.5 billion. This represented the largest monthly narrowing of the trade deficit on record; however, it only brought the deficit back in line with levels seen in January and February. The narrower deficit was primarily due to a slowdown in imports, which was caused, in part, by the increased Covid-19 lockdowns in China. Imports of goods and services fell 3.4 percent, marking the first monthly drop in imports since last July. The widening of the trade deficit in the first quarter was the primary reason for the shrinking GDP during the quarter, so the narrowing in April is a good sign for overall economic growth in the second quarter.

On Friday, the May Consumer Price Index report was released. Headline consumer prices increased 1 percent during the month, which was up from the 0.3 percent increase in April and higher than the expected 0.7 percent increase. On a year-over-year basis, consumer prices increased 8.6 percent in May against calls for an 8.3 percent increase. This marks a 40-year high for year-over-year consumer inflation, which is disappointing given the calls for a potential peak in headline inflation in April. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.6 percent during the month and 6 percent on a year-over-year basis against forecasts for a 0.5 percent monthly and 5.9 percent year-over-year increase. Consumer prices have faced notable inflationary pressure during the past year, with the initial surge in prices focused primarily on rising costs for goods. Recently, we’ve seen prices for services face more sustained upward pressure, which contributed to the larger-than-expected increases in headline and core inflation.

Friday also saw the release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. Sentiment soured more than expected during the month, as the index fell from 58.4 in May to 50.2 in June against calls for a more modest drop to 58.1. This larger-than-expected decline was due to worsening consumer views on both the current economic condition and future expectations, and it brought the index to a new record low. The primary driver for the worsening views was the rising concerns about inflation, as 46 percent of respondents attributed their negative views to inflation, which was up from 38 percent in May. The report also showed that consumer expectations for inflation increased in both the short and long term, which is a potential cause for concern. All in all, this report was another reminder of the negative impact that high levels of inflation can have on the overall economy and indicates increasing consumer concern.

What to Look Forward To

On Tuesday, the Producer Price Index report for May is set to be released. As was the case with consumer inflation, producer inflation is expected to remain high. Headline producer prices are expected to increase 0.8 percent during the month and 10.8 percent on a year-over-year basis. Core producer prices, which strip out the impact of food and energy prices, are set to increase 0.6 percent during the month and 8.6 percent on a year-over-year basis. Producer prices have faced persistent inflationary pressure over the past year, driven, in large part, by rising material costs and tangled global supply chains. If estimates hold, this report would be another sign that inflationary pressure remains high throughout the economy despite recent efforts from the Fed to tighten monetary policy to combat inflation. Given the prospects for continued high inflation in the months ahead, the Fed is expected to focus on tighter policy throughout the year and into 2023.

On Wednesday, the May retail sales report will be released. Retail sales are expected to increase 0.2 percent during the month, following a 0.9 percent increase in April. Core retail sales, which strip out the impact of volatile auto and gas sales, are set to increase by a more solid 0.5 percent following a 1 percent increase in April. Retail sales have held up well in 2022 following a lull in sales last December. If estimates hold, this would mark five consecutive months of retail sales growth. The consistent sales growth is a positive sign for the health of the economy given the importance of consumer spending on overall economic activity. The sales growth throughout the year has been especially impressive given the headwinds created by health risks at the start of the year, sinking consumer confidence, and persistently high levels of consumer inflation.

Wednesday will also see the release of the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence is expected to decline modestly during the month, with the index set to drop from 69 in May to 68 in June. This is a diffusion index where values above 50 indicate expansion, so this anticipated result would be a sign of continued growth for the home building industry. Home builder confidence had previously been well supported by high levels of home buyer demand and a low supply of existing homes for sale during the past two years. That said, we’ve seen confidence falter in 2022 due to rising material and labor costs along with signs of slowing prospective home buyer demand. Builder backlogs remain long, so new home construction should continue at a strong pace in the months ahead; however, rising mortgage rates and continued high housing costs could serve as headwinds for notably faster construction growth.

The third major release on Wednesday will be the FOMC rate decision from the Fed’s June meeting. The central bank started raising interest rates back at its March meeting, with a 25 bp hike to the federal funds rate that was followed by an additional 50 bp hike at the May meeting. Economists and markets expect to see another 50 bp hike at the June meeting. This will be a widely monitored release given the higher-than-expected consumer inflation in May and the Fed’s ability to cause potential market volatility. Looking forward, markets anticipate another 50 bp hike at both the July and September FOMC meetings, which signals tighter financial conditions ahead. Given the continued strength of the labor market and the high levels of inflation, the Fed is expected to focus on combating inflation with tighter policy throughout the rest of the year.

On Thursday, the May building permits and housing starts reports will be released. Permits are expected to decline 1.8 percent during the month, while starts are set to drop 1 percent. While both of these measures on new home construction are expected to decline in May, they are expected to remain well above pre-pandemic levels and near post-pandemic highs. Demand for new houses has started to fade given the increase in mortgage rates this year, but it remains relatively strong on a historical basis. Given the continued lack of supply of existing homes for sale, new home construction is expected, although we may see a slowdown in the months ahead due to the headwinds currently affecting the housing sector.

We’ll finish the week with Friday’s release of the May industrial production report. Production is set to grow 0.4 percent following a 1.1 percent increase in April. Hotter-than-normal weather caused utility production to increase notably, which should help support overall industrial production. We’ve also seen mining and drilling output increase with the rise in oil and gas prices. Manufacturing production is also expected to show continued growth during the month, with economists calling for a 0.2 percent increase in May following a 0.8 percent rise in April. If estimates hold, this would be the fifth straight month with increased industrial production and the fourth straight month with rising manufacturing production. High levels of consumer and business demand for manufactured goods have helped support the improvements in production we’ve seen so far this year. But looking forward, the industry is expected to face headwinds from rising prices and supply chain constraints.

That’s it for this week—thanks for reading!

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