By Aaron Back
May 16, 2024
Is Goldilocks back already? Certainly the bears are nowhere to be seen.
The cozy consensus that was prevalent late last year of a just-right pairing of slowing inflation and solid growth was upended by stubbornly high inflation readings for the first few months of 2024. So investors breathed a sigh of relief on Wednesday when April’s consumer-price index came in a tad below expectations.
Perhaps just as significant was a weak reading for April retail sales out on the same day, adding to recent evidence that consumers are being weighed down by a host of factors. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all rose to record levels on Wednesday.
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First things first: The trend of disinflation, while frustratingly slow to many observers, remains undeniably intact. The core CPI excluding food and energy has either decelerated or remained basically steady on a year-over-year basis in each of the last 14 months. At 3.6% in April, core CPI was rising at its slowest pace from a year earlier since April 2021.
“The CPI report is consistent with a two steps forward, one step back progression back to the Fed’s inflation target,” wrote Comerica Chief Economist Bill Adams in a report.
On top of that, signs of an economic slowdown are piling up. Jobs growth slowed markedly in April—particularly in the leisure and hospitality sector, which added just 5,000 jobs compared with 53,000 the prior month, according to Bureau of Labor Statistics data.
On Wednesday, the Commerce Department said retail sales were flat in April from March, contrary to consensus expectations for a 0.4% rise. Retail sales were up 2.7% from a year earlier, decelerating from 3.5% in March. So-called “control retail sales,” a measure favored by economists that strips out food services, autos, gasoline stations and building materials, was up 3.5% from a year earlier in April compared with a 4.8% rise in March.
This matches up with reports from companies such as Starbucks, McDonald’s, Home Depot and others of a recent chill in consumer spending. The cumulative impact of elevated prices, interest rates and debt levels appears to be taking a toll.
But not too much of a toll. After all, a 3.5% year-over-year increase in control retail sales hardly spells recession. The economy has also added a monthly average of 242,000 jobs over the past three months.
The slowing trend still bears watching, though. If it continues alongside gradual disinflation, it could be what ultimately forces the Fed’s hand into cutting rates.
By Wednesday afternoon, futures markets were pricing a 75.3% chance of one or more cuts by the Fed’s September meeting, according to the CME FedWatch Tool, up from 65.1% a day earlier. But the July meeting remains an interesting dark horse candidate at 34.9% odds of a cut. It concludes on the last day of that month. That means there will be time for two more full sets of monthly data on inflation, jobs, retail sales and other data before the July meeting.
A summer surprise can’t be ruled out.
Write to Aaron Back at aaron.back@wsj.com
Dow Jones & Company, Inc.
