Monday Update: Inflation on the Rise

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Apr 16, 2018 12:38:06 PM

and tagged In the News

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Monday updateLast week, the news was largely about inflation, with producer and consumer prices leading the way. The week ahead will be a busy one for economic news. Reports will give us a look at consumer spending, the housing market, and industrial production and manufacturing. In other words, we’ll get an update on the entire economy.

Last week’s news

On Tuesday, the headline producer prices report increased by 0.3 percent for March. This result was well above expectations for a 0.1-percent increase and up from a 0.2-percent increase in February. On an annual basis, the change jumped from 2.8 percent to 3 percent, well above the Fed’s target range and a five-month high. The core index, which excludes food and energy and so is a better economic indicator, also rose more than expected. It was up from 0.2 percent in February to 0.3 percent for March, and the annual figure jumped from 2.5 percent to 2.7 percent—a seven-year high. This reflects the dollar’s depreciation and the consequent rise in import prices. These results are well above the Fed’s target range, so will boost the chances for a rate hike in June.

On Wednesday, the consumer prices report also showed rising inflation. The headline index dropped from 0.2-percent growth in February to a 0.1-percent decline in March; however, the annual figure ticked up from 2.2 percent to 2.4 percent as weak March data from last year dropped out of the calculation. Core inflation, which excludes food and energy, stayed stable at a 0.2-percent growth rate for March, the same as February and as expected. But here the annual figure also jumped from 1.8 percent to 2.1 percent, as expected. As with the producer prices, these results are moving above the Fed’s target range and will support further rate increases.

Speaking of the Fed, on Wednesday, the central bank released the notes from the March meeting of its Open Market Committee. After the committee raised rates in March, the notes showed that members were convinced that economic growth continued and were getting more worried about the economy getting overheated. This supported the idea that rate increases would likely continue through 2018.

Finally, on Friday, the University of Michigan released its consumer confidence survey, which dropped from a very high 101.4 in March to a still high 97.8 in April, although well below expectations of 100.4. The drop was attributed to recent turmoil in the financial markets and came in both the present-conditions and expectations subindices. This is still a healthy confidence level, however, and should support continued growth.

What to look forward to

The retail sales report, released on Monday, beat expectations, showing a gain of 0.6 percent in March. Economists had expected sales to grow by 0.4 percent. A rebound in auto sales and another increase in Internet sales helped push up the result. Core retail sales, which exclude autos, also improved over February, growing by 0.3 percent in March. These numbers are healthy and show that consumers are continuing to spend.

Also on Monday, the National Association of Home Builders survey is expected to remain steady at a strong 70, which would be good news for the industry. Housing starts, released on Tuesday, are expected to rise from 1.24 million in February to 1.27 million in March. After volatility in both multifamily and single-family sectors in recent months, this would be a positive development. Overall, demand remains strong, although supply is constrained, especially for existing homes.

Industrial production growth, also released on Tuesday, is expected to moderate from an unsustainable 0.9 percent in February to a still healthy 0.3 percent in March. This variance includes substantial weather-driven swings in utility production. Manufacturing output, which is a better economic indicator, is also expected to decline, largely driven by oil and gas production, from 1.3-percent growth in February to a still healthy 0.4 percent for March. There may be some downside risk here, based on a decline in hours worked and February’s strong result.

Have a great week!

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