Lots of Inflation Data This Week

This week began with some positive economic news regarding US-China trade relations. As we discussed in last week’s commentary, progress or even the potential for progress in negotiations was likely to put upward pressure on rates. That is exactly what happened this week. Rates climbed to 3-month highs after the US and China agreed to suspend most tariffs for 90 days.

To add some perspective to this situation, not a single cargo ship departed China last Friday. This is not something we have seen since the COVID shutdowns. Thankfully, we received some rate-friendly economic reports later in the week that allowed rates to bounce back.

NFIB Small Business Optimism Declines

The National Federation of Independent Business (NFIB) released its April Small Business Optimism index. It declined 1.6 points to 95, remaining under its 51-year average of 98.

A few key takeaways to note:

• Business owners who “expect the economy to improve” declined by 6% to 15%. 
• Owners who have “current job openings” declined by 6% to 34%. 
• Owners who say now is a “good time to expand” is flat at 9%.

CPI Report Shows Cooling Inflation

The Consumer Price Index (CPI) for April was pretty tame but is still showing Shelter higher than other current rental reports indicate. With Shelter accounting for 44% of the Core index, the inflation reading is still showing a significant lag behind the current economy.

• April showed a rise in inflation of 0.2%, lower than expectations.
• Yearly, inflation also dropped from 2.4% to 2.3%, lower than expected.
• Food and gasoline prices declined and helped this number.
• Stripping out the volatile Food and Energy prices, the Core CPI rate increased 0.2%, meeting expectations.
• Year-over-Year, Core CPI remained at 2.8%. 

It is likely that price changes from tariffs were not reflected in this report.

CPI Rent Data Overstates Inflation Impact

Realtor.com reported that new rents fell 1.7% YoY as of April and follows 21 consecutive monthly reports of YoY declines. In contrast, the CPI report shows rents rising by 4% YoY. This disconnect is likely producing an overstatement of about 0.5% in Core CPI.

PPI Misreported, Then Corrected

The Producer Price Index (PPI) for April was also released this week and showed cooling inflation, unless you watched CNBC. 

Banners announcing the PPI results on CNBC stated that monthly inflation rose 0.5%, when the actual results were a decline of 0.5%. Traders will make trades as fast as possible following the release of an economic report. This error, which was later corrected, likely caused volatility as markets dropped and then rose significantly later in the morning. 

Core PPI Falls, March Revised Up

Core PPI came in down 0.4%, much lower than market estimates of a 0.3% rise. Interestingly, March’s PPI numbers saw a massive revision from -0.1% to +0.4%. Despite the revision higher, April’s number still was better by 0.2%. 

The Bureau of Labor Statistics (BLS) puts out the PPI report. This commentary regularly discusses the large revisions we see in the monthly Jobs report also put out by the BLS. These large revisions are bringing into question the reliability of BLS’s reporting. 

Businesses Likely Absorbing Tariff Costs for Now

Since PPI is for Wholesale Inflation, before setting consumer prices, it likely is showing that businesses are absorbing the higher tariff costs currently. As an example, Walmart said that they have been absorbing the higher costs but for consumers to expect price hikes in the near future. 

It will be important to see how inflation trends adjust. Will higher prices reflect in the Fed’s favorite Personal Consumption Expenditures (PCE) inflation report coming out later this month?

New Home Starts Lag Household Formations

Friday saw April data on New Home Permits and Starts. A Permit may not result in a new home, but a Start means that a shovel is in the ground and a house is likely to follow. These numbers give us a good indication of the future of home prices.

As has been shown for several years, the future of home values is strong. The annualized pace of Starts was 1.36M. When compared to the 5-year annualized pace of Household Formations (new families formed that need housing) at 1.8M, we can see significantly less future supply relative to future demand. This will help to keep home prices higher.

Core Retail Sales Miss Expectations

Core Retail Sales is an important indicator of the economic health of consumers and our nation. It is a component of Gross Domestic Product (GDP).

It fell 0.2% in April, which was worse than the 0.3% rise expected. This report, coupled with the positive inflation reports, and also bad GDP news from Japan helped rates to rebound to the level we saw at the end of last week.

Looking Ahead

Next week is quieter as we look forward to the long Memorial Day weekend.

Wednesday, May 21:

• 20-Year Auction

Thursday, May 22:

• Initial Jobless Claims
• Existing Home Sales

Friday, May 23:

• New Home Sales
• Bond market closes at 2pm ET for the holiday