Core Retail Sales Growth Remains Soft, and Inflation Reports Push Bond Market Expectations Closer to Fed Rate Cut Guidance

By klrw460 March 15, 2024

In February, the Consumer Price Index (CPI) saw a rise of 0.4 percent and an annual increase of 3.2 percent, marking a slight increase from January’s figures as reported by the Bureau of Labor Statistics (BLS). A notable factor in the month’s inflation was a 3.8 percent increase in gasoline prices. When food and energy were excluded, the core CPI went up by 0.4 percent for the month, with a year-over-year rise slowing to 3.8 percent. Notably, after an unexpected surge in January, both the owners’ equivalent rent (OER) and overall shelter costs increased by a more moderate 0.4 percent in February, while rent prices saw a 0.5 percent rise. Unlike the previous month, February did not continue the deflation trend in core goods, as evidenced by a 0.5 percent increase in used auto prices following a 3.4 percent drop, and apparel prices rising by 0.6 percent, marking their first increase in six months.

The Producer Price Index (PPI) experienced a 0.6 percent increase in February, with the annual comparison rising by six-tenths to 1.6 percent, as per the BLS. The primary driver behind this gain was a 4.4 percent jump in energy prices. Excluding food, energy, and trade services, the core PPI increased by 0.4 percent over the month and by 2.8 percent over the year.

Retail sales and food services rebounded with a 0.6 percent increase in February, recovering from a revised 1.1 percent decline in January, according to the Census Bureau. Significant growth was observed in motor vehicle sales, building materials, garden equipment, and a 0.9 percent increase in gas station sales attributed to price factors. The control group retail sales, which are integral to GDP estimation and exclude auto, building supplies, and gas station sales, remained steady for the month but saw a slight upward revision in January.

Industrial production, reflecting output in the manufacturing, utility, and mining sectors, marginally increased by 0.1 percent to 102.2 in February, following a downward revision in January, as reported by the Federal Reserve Board. Manufacturing activity improved by 0.8 percent, though it still lagged behind December levels after a significant downward adjustment in January. Mining output saw a rebound of 2.2 percent following weather-related disruptions in January, while utility output declined by 7.5 percent, influenced by weather conditions.

The National Federation of Independent Business (NFIB) Small Business Optimism Index dropped by 0.5 points to 89.4 in February. The data revealed that only 12 percent of firms planned to increase employment, the lowest figure since 2016 excluding the initial pandemic impact, and just 21 percent of firms intended to invest in capital expenditures, marking the lowest point since April 2023. A decrease was also observed in the number of firms raising worker compensation over the previous three months, the lowest since May 2021. Inflation remained a predominant concern among businesses, with 23 percent citing it as their major challenge, an increase from the previous month.

Forecast Impact: The CPI figures were broadly aligned with consensus forecasts and expectations, though core inflation was slightly higher than anticipated. Nevertheless, the detailed analysis offers a more positive outlook than the headline numbers might suggest. There is an expectation for the resumption of deflation in core goods in the upcoming months, as data on used auto auctions continue to show price reductions and supply chain improvements. Additionally, after a notable increase in January, OER and shelter costs saw a moderation in February, suggesting potential disinflationary trends in housing costs ahead. The CPI report’s findings, coupled with a robust PPI reading, are unlikely to provide the Federal Reserve and Chair Powell with the confidence needed to initiate interest rate cuts in the near term. The anticipation is for the first rate cut to happen in June, with a possibility of delay rather than an early adjustment.

Control group retail sales, directly influencing the GDP estimate, were weaker than expected, presenting a slight downside risk to the Q1 2024 consumption forecast. The consecutive months of subdued control group retail sales indicate a potential retrenchment by consumers at the start of 2024, aligning with predictions of a slowdown in economic growth. The continued sluggishness in manufacturing data and a decline in small business optimism further support the expectation of a deceleration in growth moving forward.

For the full details and insights, please refer to the original press release at the following link: