The Independent Market Observer

Monday Update: Inflation Slowed in April

Posted by Sam Millette

This entry was posted on May 16, 2022 12:26:19 PM

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Monday UpdateAll eyes were on last week’s release of the consumer and producer inflation reports for April. They showed that inflationary pressure moderated during the month following a surge in March, but there is still a lot of work to be done to get rising prices under control. This will be a busy week of economic updates, with reports scheduled that will cover retail sales, industrial production, and the housing sector.

Last Week’s News

On Wednesday, the April Consumer Price Index report was released. Consumer inflation moderated during the month, as prices increased 0.3 percent in April following a 1.2 percent surge in March. This was slightly higher than the 0.2 percent increase economists expected but still a notable decline in inflationary pressure. On a year-over-year basis, consumer prices rose 8.3 percent in April, down from 8.5 percent in March and slightly above the expected 8.1 percent increase. The slowdown in consumer inflation was partially due to the impact of relatively stable gas prices in April following a surge in March. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.6 percent during the month and 6.2 percent on a year-over-year basis. Economists forecasted 0.4 percent monthly and 6 percent year-over-year increases in core consumer prices during the month. While core consumer inflation came in modestly above forecasts, this marks a three-month low for core year-over-year inflation, which is an encouraging sign.

On Thursday, the Producer Price Index report for April was released. As was the case with consumer inflation, producer inflation slowed during the month. Headline producer prices increased 0.5 percent in April and 11 percent on a year-over-year basis, down from the upwardly revised 1.6 percent monthly and 11.5 percent year-over-year increases we saw in March. These results were largely in line with economist expectations and showed that inflationary pressure moderated in April compared to March. Core producer inflation also showed signs of slowing, with core producer prices increasing 0.4 percent during the month and 8.8 percent on a year-over-year basis compared to the upwardly revised 1.6 percent monthly and 9.6 percent year-over-year growth in March. Overall, both reports showed signs of slowing inflation; however, there is a lot of work to be done to get it back down to the Fed’s 2 percent target. Economists and investors largely expect to see the central bank focus on tamping down inflationary pressure throughout the year by tightening monetary policy.

We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for May. Consumer sentiment declined more than expected to start the month, with the index dropping from 65.2 in April to 59.1 in May against calls for a more modest drop to 64. This larger-than-expected decline was due to souring consumer views on both the current economic conditions and future expectations. Consumer inflation expectations for both the short and long term remained unchanged during the month, which was a silver lining for an otherwise disappointing report. Historically, higher levels of confidence have helped support faster consumer spending growth, so this is typically a widely monitored leading indicator for future spending growth. That said, consumer spending has held up relatively well during the past year despite declining sentiment. Looking forward, if we see confidence start to recover in the months ahead, it could lead to faster spending growth during the rest of the year.

What to Look Forward To

Tuesday will see the release of the April retail sales report. Retail sales are set to accelerate during the month, with forecasts calling for a 1 percent increase in sales following a 0.5 percent increase in March. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to increase 0.7 percent during the month following a 0.2 percent increase in March. If estimates hold, this would mark four consecutive months of rising headline and core retail sales. This would be an encouraging sign that consumers were willing and able to power the economic recovery through increased spending despite headwinds created by rising prices and the earlier Omicron-induced case growth. Given the importance of consumer spending on the overall economy, this will be a closely followed report that will give economists a better look at economic growth at the start of the second quarter.

Tuesday will also see the release of the April industrial production report. Production is set to increase 0.4 percent during the month following a 0.9 percent increase in March. Manufacturing production is expected to increase 0.3 percent during the month following a 0.9 percent increase in March. Both industrial and manufacturing production have shown solid growth throughout the year despite headwinds created by high levels of case growth that led to worker absenteeism at factories in January and February. If estimates hold, this would mark four straight months of production growth. One of the drivers of the strong growth in March was an improvement in capacity utilization due to returning workers. Economists expect to see further improvements in April with forecasts calling for an increase in capacity utilization from 78.3 percent in March to 78.5 percent in April. This would represent the highest utilization rate since early 2019, signaling continued recovery for the industrial and manufacturing sectors to start the second quarter.

The third and final major data release on Wednesday will be the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence is expected to drop from 77 in April to 75 in May. This is a diffusion index where values above 50 indicate growth, so this result would still signal continued expansion for the month, just at a slightly slower pace. Both home builder confidence and new home construction have been strong since initial lockdowns were lifted. High levels of home buyer demand and low inventory of existing homes for sale led to a surge in new home construction throughout the pandemic. We’ve started to see home builder confidence decline in 2022, as rising material costs, labor costs, and mortgage rates have started to weigh on the housing industry. That said, while confidence has cooled to start the year, it remains in healthy expansionary territory.

Thursday will see the release of the April building permits and housing starts reports. These measures of new home construction are both expected to fall during the month following better-than-expected increases in March. Permits are set to drop 2.4 percent in April following a 0.4 percent increase in March. Starts are expected to decline 1.3 percent in April after rising 0.3 percent in March. The better-than-expected results in March brought starts to their highest level since 2006, while permits remained well above pre-pandemic levels. While both are expected to decline in April, this would leave the pace of new home construction well above pre-pandemic levels. Additionally, this would signal continued expansion for this important sector of the economy.

We’ll finish the week with Friday’s release of the April existing homes sales report. Sales of existing homes are expected to drop 2.1 percent during the month following a 2.7 percent decline in March. Existing home sales surged at the start of the year, driven, in part, by prospective buyers looking to lock in low mortgage rates. Since then, we’ve seen prices continue to climb along with mortgage rates; this has served as a headwind for the pace of existing home sales since February. We’ve seen the average 30-year mortgage rate climb from 3.27 percent at the start of the year to 5.42 percent at the end of April, which increased the cost of buying an existing home for prospective home buyers. The April existing home sales report will give us a better idea of the impact that rising mortgage rates have on prospective home buyer demand; however, the pace of existing home sales is still expected to remain above pre-pandemic levels.

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


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