Just when we thought it was safe to stop worrying, it isn’t. Until recently, most data pointed to a path of falling inflation and a strong economy. The past two months changed that. Economists tried to write off January’s higher-than-expected inflation data as a one-off occurrence. This week’s February data suggests it may be more than just a one-month anomaly, but rather signs of persistent inflation and a softening consumer.
Both consumer and producer price indices rose more than anticipated in February, both on a monthly and year-over-year basis. Combined with January’s high levels, the increases are at risk of reversing the declining trend that was in place late last year. CPI rose at the fastest monthly pace since September 2023 and the year-over-year PPI rate of 1.6% also remains the highest since then. Also bucking the trend is where the price changes are occurring. The rise was driven at both levels by higher energy and gasoline costs, which had been tempered in past months. Services costs, while still high, rose at a smaller pace due to slightly moderating rent prices. Shelter is the largest category within services and has been the main driver of services inflation. The transitory rate of inflation is being replaced by demand stickiness that the Fed may not be able to control.
KEY INDICATORS THIS WEEK
Retail Sales – Consumers spent less than expected on goods in February but still more than in the previous four months. Headline sales were up 0.6% in February versus an expected 0.8% and sales minus autos rose 0.3% versus 0.5%. The good news, however, was tempered by downward revisions to both December and January sales, suggesting even the holiday season did not end as strong as we thought. The -0.8% slump in January became -1.1%, pushing January’s numbers even deeper. While consumers are still spending, the spending is more cautious. Non-store sales, the proxy for internet sales and what has been the number one way to shop nowadays, fell for the second month in a row. Sales at restaurant and drinking places, the only service category in the index, rose 0.4% after two negative months, a sign that weakness may be creeping into the services sector. It will take a few more monthly readings to determine if the spending pullback is temporary or becoming a trend.
Pre-FOMC – The FOMC begins its two-day meeting on March 19 with the formal rate decision announced the following day. This week’s less than stellar economic data gives committee members every reason to pass on a rate cut at this meeting, opting instead to gain more hard evidence that inflation is truly on its way down. At this point, fed funds futures are placing a 56% chance for a cut in June and 74% chance for a September move. The FOMC will also release its quarterly Summary of Economic Projections next week.