Better news on inflation clouded by weaker retail results last month

Today’s news delivered a critical one-two punch of data regarding inflation and retail sales, contributing to a mixed view for the consumer sector. Like much of the data in recent months, there was something for everyone to support either a positive or negative narrative on the state of the consumer economy. Together, it reinforces a muddy view of an economy that has cooled but isn’t cold.

On a cautionary note, the weaker-than-expected report on April retail sales was another warning shot that the economy continues to lose momentum. Sales were flat in April in nominal terms, with weakness widespread across retail sectors. Taking gas stations out of the equation, sales contracted by 0.2% for the month. Over the past year, retailers have experienced a modest 3% increase in sales — a result that appears even weaker against the backdrop of the inflationary environment.

Consumers continue to exhibit greater inhibition for spending on high-ticket items, including cars and home furnishings. Some of that change in behavior reflects a higher interest rate hurdle for borrowing to finance large purchases, but it’s also likely the continued hangover from the initial buying binge on goods that led the recovery in spending in the early stages of the expansion.

Gas stations were the primary positive outlier, as the average price for a gallon of fuel surged by over 5% during the month. That propped up gas station sales, but also chewed into discretionary income, diluting household spending elsewhere.

If the April retail numbers were reason for caution, the monthly print for consumer inflation provided a source of relief.

The consumer price index advanced by 0.3% in April, sufficient to bring the year-on-year increase back to 3.4%, breaking a string of consecutive increases that ignited concern about a second inflation wave potentially emerging.

The decrease was even more notable given the sharp uptick in gasoline prices in April. Flat food prices offset the impact of higher energy costs though, leaving the monthly advance in the core CPI in line with the headline increase of 0.3%.

More notable was the continues steady decline in core inflation over the past year. The 12-month reading for core CPI dipped to 3.6% — its lowest one-year advance since April 2021 when inflation pressures were still building.

The underlying inflation picture aligns well with how consumers are spending. Setting aside food and energy, goods prices have softened considerably, declining 1.3% over the past year. The primary source of inflation today is squarely centered in the service sector, where the impact of tight labor markets has been particularly noteworthy. Wage growth recently dipped below 4% and is likely to continue to decline as labor demand eases.

Shelter costs rose by 0.4% in April and 5.5% over the past year — also a significant contributor to the overall inflation outlook given its significant weighting within the index. The impact of higher home prices and elevated mortgage rates have softened up demand, allowing home prices to stabilize. That, coupled with moderating rental rates, should continue to feed into further moderation in shelter inflation.

A combination of moderating wage growth and a flattening in home prices and rental rates should contribute to further easing in inflation in the coming months.

The bottom line? The mixed news in the April retail and inflation data exemplifies the mixed data that has defined the economy in recent months. It’s largely good news for the Fed, who long warned of “pain” that would be needed to bring inflation back under control. Whether that pain culminates in a recession remains to be seen, but a marked slowdown in growth is well underway. The good news is that the Fed’s aggressive action to cool demand appears to be slowly bringing inflation back down to a more palatable level, although the path to 2% hasn’t been easy and still appears to be further out than policymakers would prefer.