The Independent Market Observer

Monday Update: Consumer Prices Rise by More Than Expected

Posted by Sam Millette

This entry was posted on Jun 14, 2021 12:03:42 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette highlights April’s international trade report, consumer inflation in May, and consumer sentiment in June.Last week saw a number of important economic updates, with a focus on April’s international trade report, May’s consumer inflation report, and the preliminary estimate of the University of Michigan consumer sentiment report for June. Consumer inflation came in above economist estimates, but the markets largely shrugged off the news. This week will be another busy one, with updates on May’s retail sales, industrial production, and new home construction serving as potential highlights.

Last Week’s News

We started the week with Tuesday’s release of the April international trade report. The trade deficit narrowed during the month, with the overall deficit declining from $75 billion in March to $68.9 billion in April. Calls were for the deficit to drop to $68.7 billion. This report marks the first time the trade deficit has narrowed this year, driven by rising exports and falling imports. March’s trade deficit was the largest single-month deficit on record, so the decline in April was a positive development. It brought the deficit closer to levels last seen in January. Encouragingly, the overall level of exports in April reached its highest level since January 2020. This is a good sign for further export growth, indicating that the global economic recovery is driving additional demand for U.S. goods and services. Overall, this report was encouraging. It indicates that international trade is heading toward more normal conditions, although work must be done to get there.

On Thursday, the Consumer Price Index for May was released. Consumer prices increased by more than expected. Headline prices rose by 0.6 percent during the month and 5 percent year-over-year. Economist estimates had called for 0.5 percent and 4.7 percent increases on a monthly and year-over-year basis, respectively. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.7 percent during the month and 3.8 percent year-over-year. As was the case with headline prices, core prices rose unexpectedly. Forecasts called for a 0.5 percent increase during the month and a 3.5 percent year-over-year increase. For both headline and core prices, some of the large annual growth is due to comparisons with last year’s prices, which were driven down by the initial lockdowns. With that said, certain consumer goods have seen upward price pressure recently, largely due to a surge in demand and lack of available supply. While Fed members continue to state their case that the rise in prices will be transitory, this release will continue to be closely monitored in the months ahead.

Thursday also saw the release of the initial jobless claims report for the week ending June 5. The number of initial jobless claims fell from 385,000 to 376,000, against calls for a further decline to 370,000. This solid result brought the number of weekly layoffs to its lowest level since the start of the pandemic. Marking six consecutive weeks with declining initial jobless claims, this report is an encouraging signal. It shows that the continued reopening efforts across the country are helping to move the economy toward more normal conditions. The May jobs report showed that the hard-hit leisure and hospitality sector continued to improve, giving us another sign that reopening efforts are having a positive impact on the labor market. Overall, this solid report indicates we may be approaching more normal economic conditions. Continued progress on the public health front and the associated easing of state and local restrictions are driving the improvements.

We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This widely followed gauge of consumer confidence increased by more than expected to start the month. The index rose from 82.9 in May to 86.4 in June, against calls for a more modest increase to 84.2. This result was driven by improving consumer sentiment for the current situation and for future expectations. Part of the gain in future expectations can be attributed to declining consumer inflation expectations in June compared with May. This solid result brought consumer confidence to its second-highest level since the start of the pandemic, trailing only March’s 88.3 reading. Confidence has rebounded well since hitting a lockdown-induced low of 71.8 last April. Nonetheless, work must be done to get back to the pre-pandemic high of 101 we saw in February 2020. Typically, rising consumer confidence levels support faster consumer spending growth. Accordingly, this stronger-than-expected result is a good sign for spending in June.

What to Look Forward To

On Tuesday, the May retail sales report is set to be released. Economists expect to see headline retail sales fall by 0.5 percent, following a flat April. The anticipated decline reflects the fading nature of the federal stimulus payments. Sales surged by 10.7 percent in March, driven in large part by the round of $1,400 checks hitting bank accounts during the month. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to remain flat in March, following a 0.8 percent decline in April. As was the case with headline sales, core retail sales saw a stimulus-induced 8.9 percent increase in March. While the forecasts for May’s headline and core retail sales are modest, the overall level of sales has already rebounded well past pre-pandemic levels. Accordingly, the continued moderation of sales growth is understandable. Looking forward, additional progress on the mass vaccination front and improving consumer confidence levels may support a return to sales growth.

Tuesday will also see the release of the May Producer Price Index. Economists expect to see producer prices rise by 0.4 percent during the month and 6.2 percent year-over-year. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.5 percent during the month and 4.8 percent year-over-year. As was the case with consumer prices, part of the anticipated annual rise in producer prices can be attributed to comparisons with last year’s lockdown-suppressed prices. Producers have seen upward pressure on prices throughout this year, as rising material costs and supply bottlenecks boosted inflationary pressure. Additionally, rising labor costs have become a concern for producers. Still, the Fed believes that these headwinds will dissipate as we head toward more normal economic conditions.

The third major data release on Tuesday will be the release of the May industrial production report. Production is expected to increase by 0.6 percent, following a 0.7 percent increase in April. If estimates hold, this report would mark three straight months with increased production, following the drop in February due to unseasonably cold weather. The rebound in overall industrial production has been supported by increased manufacturing production over the past two months. Manufacturing production is slated to rise by 0.7 percent in May, driven by continued high levels of consumer demand. This result would be an improvement from the 0.4 percent increase in April’s manufacturing output. It would also mark three straight months with increased production. Overall, if estimates hold, this report is expected to show steady growth for industrial and manufacturing production, despite headwinds created by rising prices and supply chain constraints.

The final major data release scheduled for Tuesday is the release of the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence is expected to remain steady at 83, marking three straight months with no change for the index. This is a diffusion index, where values above 50 indicate expansion. Accordingly, the estimated result would be positive, signaling continued high levels of home builder confidence. The index is expected to remain well above the pre-pandemic high of 76 we saw in December 2019. Home builder confidence has been supported throughout the past year by record low mortgage rates and shifting home buyer demand due to the pandemic. Additionally, a lack of supply of homes for sale has boosted confidence for builders. Although rising material and labor costs have recently become a headwind for home builder confidence and construction, the housing market should to continue to show healthy growth in the months ahead.

Wednesday will see the release of the May building permit and housing starts reports. These measures of new home construction are expected to show mixed results during the month. Permits are expected to decline by 0.2 percent, and starts are expected to increase by 5.2 percent. Both permits and starts have rebounded well since initial lockdowns were lifted last year. High home builder confidence and low supply of homes for sale have supported the surge in new home constriction over the past year. If estimates hold, both permits and starts would come in above pre-pandemic levels, highlighting the improvement for this important sector. Looking forward, rising material and labor costs may serve as a headwind for significantly faster levels of new home construction. Still, if the pace of construction remains near current levels, it would signal a healthy housing market.

Wednesday will also see the release of the FOMC rate decision from the Fed’s June meeting. The Fed cut interest rates to virtually zero last March due to the pandemic, and economists do not anticipate any changes at this meeting. In fact, the Fed has projected that no interest rate hikes will occur until 2023 at the earliest. Accordingly, economists’ focus will be on the press release, as well as Fed Chairman Jerome Powell’s post-meeting press conference. The Fed is currently purchasing $120 billion a month in Treasury and mortgage-backed securities. The meeting may see discussion about when and how the Fed plans to taper these asset purchases going forward. Market participants expect a gradual tapering of these purchases, but, so far, the Fed has not given any material guidance on such plans. Any mention of this topic has the potential to affect the markets, so this meeting will be widely followed.  

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending June 12. Economists expect the number of weekly initial unemployment claims to fall from 376,000 to 360,000. If estimates prove accurate, weekly layoffs would sink down to their lowest level since the start of the pandemic, marking seven straight weeks with declining claims. This year, following a high of just more than 900,000 initial weekly claims set in January, we’ve made solid progress in getting claims down. Continued improvements on the public health front and the associated reopening efforts across the country have been driving this progress. So, although work remains to get the job market back to pre-pandemic levels, the continued improvement for initial claims throughout the year signals we’re on the right path.

That’s it for this week—thanks for reading and stay safe!

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