The Independent Market Observer

Monday Update: Inflationary Pressure Picks Up in April

Posted by Sam Millette

This entry was posted on May 17, 2021 11:59:26 AM

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In his Monday Update, Commonwealth’s Sam Millette highlights the April inflation report, the housing sector, and the minutes from the Fed’s recent meeting. Last week saw a number of important data releases, with much of the focus falling on the April inflation reports showing prices rising by more than expected during the month. This will be another busy week for updates, with the housing sector and the minutes from the most recent Fed meeting serving as highlights.

Last Week’s News

On Wednesday, the April Consumer Price Index was released. Consumer prices rose by more than expected during the month, increasing by 0.8 percent against forecasts for a 0.2 percent rise. This result brought the pace of year-over-year consumer inflation up to 4.2 percent, a figure higher than the 3.6 percent annual increase expected. The increase in inflationary pressure was widespread, as core consumer prices, which strip out the impact of volatile food and energy prices, also rose above anticipations. Core consumer prices went up by 0.9 percent during the month and 3 percent on a year-over-year basis. Economists had estimated we would see a 0.3 percent monthly and 2.3 percent year-over-year increase. While some of the annual rise for core and headline prices is due to base effects caused by the sharp decline in prices last April, the report indicates that inflationary pressure is increasing. The April report marks six straight months with accelerating headline consumer inflation. Given the notable rise in prices we’ve seen recently, this report will continue to be widely followed.

Thursday saw the release of the April Producer Price Index. As was the case with consumer prices, producer prices rose by more than expected on both a monthly and year-over-year basis. Producer prices increased by 0.6 percent for the month and 6.2 percent year-over-year. This result was higher than economist estimates for a 0.3 percent monthly increase and a 5.8 percent annual increase. Once again, base effects are partially to blame for the large year-over-year surge in inflation. With that said, producer prices have seen recent upward pressure due to rising material costs and supply chain disruptions. The April report showed material prices going up, as bottlenecks and shortages of key components continued to drive rising costs for producers. The Fed continues to closely monitor inflation, but board members have indicated they view rising inflationary pressure as largely transitory. Given the continued stress on the labor market, the central bank is expected to keep monetary policy supportive for the foreseeable future.

Thursday also saw the release of the initial jobless claims report for the week ending May 8. During the week, 473,000 initial unemployment claims were filed, down from the 507,000 claims filed the week before. This result was below economist estimates for 490,000 initial claims. Encouragingly, this report marks a new pandemic-era low in terms of initial weekly layoffs. While initial claims can be volatile on a week-to-week basis, we’ve seen a steady progress in lowering claims over the past few months. Improvements on the public health front have allowed businesses to reopen across the country. The four-week moving average for claims fell to 534,000, which is the lowest level seen since the start of the pandemic and well below the 2021 high of 865,000 claims recorded at the end of January. So, although the April employment report came in below estimates, the continued improvement for initial claims in May is an encouraging sign for the labor market. It is continuing to benefit from recent economic reopening efforts.

On Friday, the April retail sales report was released. Sales remained unchanged during the month, following an upwardly revised 10.7 surge in sales in March. The April result was below economist estimates for a 1 percent increase in sales. Core retail sales, which strip out the impact of volatile auto and gas sales, fell by 0.8 percent during the month, against calls for a 0.6 percent increase. This drop follows a strong upwardly revised 8.9 percent increase in core retail sales in March. The most recent round of federal stimulus checks caused retail sales to increase at the second-fastest level on record in March, so the slowdown in April’s sales data is understandable. Despite the miss against expectations for overall sales growth, encouraging areas of growth included an increase in spending on food and drink. This indicates that reopening efforts have continued to support the economic recovery. Looking forward, continued progress on the vaccination and reopening fronts is expected to serve as a tailwind for a return to sales growth as we head into the summer.

Friday also saw the release of the April industrial production report. Industrial production increased by 0.7 percent during the month, slightly below estimates for a 0.9 percent increase. This result is a step down from the upwardly revised 2.4 percent increase in production recorded in March. Nonetheless, it represents two straight months with production growth following a weather-related slump in February. Manufacturing production rose by 0.4 percent in April, slightly above economist estimates for a 0.3 percent increase. Overall levels of manufacturing output were held back by a drop in auto production in April that was largely driven by the global semiconductor shortage. Throughout the pandemic, the producer side of the economy has been slower to recover compared with that of the consumer side. In the months ahead, however, high levels of consumer demand and continued progress on vaccination and reopening efforts are expected to serve as a tailwind for industrial and manufacturing production.

We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for May. Consumer sentiment fell to start the month, dropping from 88.3 in April to 82.8 in May. Calls had been for an increase to 90. This disappointing result was driven by rising consumer inflation concerns, which weighed on both the current conditions and future expectations portions of the index. One-year inflation expectations increased by more than expected, rising from 3.4 percent in April to 4.6 percent in May, against calls for an increase to 3.5 percent. This result represents the highest level for one-year consumer inflation expectations since 2011. Still, despite the drop in confidence, this estimate marks the third-highest level for the index since the initial lockdowns ended last year. Given the improvement in consumer sentiment compared with earlier in the pandemic, continued consumer spending growth should be supported.

What to Look Forward To

On Monday, the National Association of Home Builders Housing Market Index for May was released. Home builder sentiment remained healthy during the month, as the May index was unchanged at 83, in line with economist estimates. This strong result left home builder confidence near the record high of 90 set in November 2020, signaling robust levels of confidence. Home builder sentiment rebounded swiftly following the end of initial lockdowns last year, as low mortgage rates and high home buyer demand sparked a rally for the housing sector. Supply of homes for sale remains low across much of the country, which has served as another tailwind for increased home builder confidence and construction over the past year. This release was a positive signal that home builders remain confident in the current housing market expansion despite rising material and construction costs. This is a good sign for construction growth in the months ahead.

Speaking of construction, Tuesday will see the release of the April building permits and new home sales reports. Permits are expected to increase by 0.7 percent during the month, following a 2.3 percent increase in March. Starts are expected to decline by 2 percent, after seeing a 19.4 percent rise in March. The pace of housing starts hit its highest level since 2006 in March, so a modest decline in April would be understandable. These measures of new home construction can be volatile on a month-to-month basis. Nonetheless, both have rebounded well past pre-pandemic levels, driven by low supply of homes for sale and high levels of home buyer demand. The fast pace of new home construction this year has been especially impressive given rising lumber and construction costs. If estimates prove accurate, these reports would be another signal that housing remains one of the bright spots in the current economic recovery.

On Wednesday, the FOMC meeting minutes from the April meeting will be released. The Fed cut interest rates to virtually zero at the start of the pandemic last March, and no changes to interest rates were made at this meeting, as expected. Additionally, the Fed did not make any changes to its current pace of $120 billion a month in asset purchases. Still, despite the meeting’s lack of major announcements regarding monetary policy, economists will be looking at the minutes closely in order to get a better understanding of the Fed’s view on the ongoing economic recovery. Given that recent inflation reports have come in above expectations, any mention of rising inflationary pressure and potential Fed responses will be examined. As Fed board members have indicated they view the current rise in inflation as largely transitory, no surprises are expected. Still, any hints about the Fed’s view on the pace of the recovery and long-term monetary policy will be closely monitored.

Thursday will see the release of the initial jobless claims report for the week ending May 15. Economists expect to see the number of initial unemployment claims fall from 473,000 to 460,000. If estimates hold, this report would bring the pace of weekly layoffs to its lowest level since the start of the pandemic, indicating that the labor market recovery has continued. While we have seen noted improvement this year in getting weekly jobless claims down, they are still high on a historical basis. Given this fact and the recent slowdown in the pace of hiring in April, the weekly initial jobless claims report will continue to be a widely monitored release. It gives economists a relatively up-to-date look into the heath of the labor market.

We’ll finish the week with Friday’s release of the existing home sales report for April. Existing home sales are expected to rise by 0.9 percent during the month, following a 3.7 percent decline in March. The March drop was largely driven by low levels of supply of homes available for sale, as well as rising mortgage rates and housing prices. A return to sales growth in April would indicate that housing demand remains strong. Despite the March results, the pace of existing home sales remains well above pre-pandemic levels. Sales were up by 14 percent on a year-over-year basis during April. Low mortgage rates have supported the housing market over the past year. Notably, however, we saw rates rise in February and March, which contributed to the slowdown in sales during those two months. With that said, mortgage rates declined in April, which should support a return to sales growth for the month.

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

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