There were two inflation reports this week: consumer inflation (the CPI) and producer inflation (the PPI). Consumer inflation dropped to 4 percent from just under 5 percent, which was a big improvement. Producer inflation dropped from 2.3 percent to 1.1 percent. You’ll notice that producer inflation is now below the Fed’s target, while consumer inflation is getting close. This is very good news.
Looking under the hood, there were some concerns. Core inflation remains higher than the headline number, as much of the drop reflected lower energy prices, which could rebound. Service inflation also remains worryingly high. So, concerns remain.
But the big picture is still positive. Lower producer inflation suggests that consumer inflation will end up coming down further and that, in the meantime, companies will be making more money, which is good for earnings and stock prices. Also good for earnings was the news that retail sales growth came in well above expectations, up 0.3 percent as opposed to an expected decline. As long as consumers keep shopping, any recession is likely to be postponed—and that is what is happening now.
The other news this week was that the Fed paused its rate increases, leaving rates steady at its most recent meeting. With inflation improving, it decided to wait and see. While the Fed did signal the possibility of more rate hikes ahead, the pause is a clear validation of the improvement so far.
Overall, we end the week in a better place than we started. Inflation is still cooling, the economy is still growing, and the Fed gave us a break. Let’s take the win here.
Have a great weekend!