Key Takeaways

• Both headline and core consumer prices rose 0.3% from a month ago, slightly slower than the pace the previous few months.
• The latest Consumer Price Index (CPI) report gave us some good signs that services inflation is easing. But in a separate report, the control group of retail sales — the category which feeds into the gross domestic product (GDP) calculations — fell 0.3% in April, suggesting consumer spending downshifted at the start of the second quarter.
• Grocery prices fell in April, giving some relief, especially for those buying meat, fruits, and vegetables.
• The “soft landing” narrative is still a possibility but not a guarantee. Markets will be seeking further confirmation, and the retail sales report did not help.

First, the Good News

Consumer inflation in April eased up a bit after a few disappointing reports at the beginning of the year. Heading into this release, markets were jittery that the inflation reports would reveal yet more stickiness, especially in services inflation.

The good news was inflation cooled, especially for several major grocery store items. Meat, fruit, and vegetable prices outright declined in April, giving those healthy consumers some reprieve.

Services inflation is still running hot, but the annual pace in April was the slowest since October as rents continued to soften. Rent prices decelerated to the slowest pace since mid-2022.

Inflation Dashboard (Y/Y %)	Aug.2023	Sep.2023	Oct.2023	Nov.2023	Dec.2023	Jan.2024	Feb.2024	Mar.2024	Apr.2024
Import Price Index	-2.97%	-1.47%	-1.82%	-1.55%	-2.40%	-1.34%	-0.85%	0.36%
Producer Prices	1.88%	1.80%	1.08%	0.77%	1.05%	0.95%	1.58%	1.83%	2.19%
Services Prices Index Level	58.7	58.6	58.0	57.6	56.7	64.0	58.6	53.4	59.2
Global Supply Chain Pressure Index Level	-1.1	-0.7	-0.4	0.2	-0.1	-0.3	-0.1	-0.3	-0.9
Gasoline Prices: U.S. Average	3.84	3.84	3.61	3.34	3.14	3.09	3.24	3.46	3.63
Consumer Prices (CPI)	3.67%	3.70%	3.24%	3.14%	3.35%	3.09%	3.15%	3.48%	3.36%
Core CPI Excluding Housing	2.33%	1.94%	2.02%	2.14%	2.21%	2.20%	2.23%	2.37%	2.13%
Rent Prices	7.78%	7.42%	7.18%	6.86%	6.45%	6.09%	5.77%	5.68%	5.44%
PCE Deflator	3.35%	3.37%	2.94%	2.70%	2.62%	2.48%	2.50%	2.71%
PCE Deflator: Core Services Ex Housing	4.16%	4.15%	3.78%	3.53%	3.34%	3.61%	3.44%	3.50%

Now, the Bad News

In a separate report, retail sales in April were unchanged from the previous month and March figures were revised lower. Now granted, that’s not terrible, but it’s definitely not good in the face of sticky inflation. Investors should anticipate a slowdown in consumer spending as excess savings have been spent and credit might not fully offset the slowdown in real disposable incomes.

Markets have not fully digested the implications of nagging inflation pressures amid slower consumer spending. Although not our base case, we should expect the “stagflation” chatter to continue. The slowdown in retail sales suggests aggregate demand is slowing and that will prompt a material improvement in services inflation. We should expect inflation to materially improve in the back half of this year, giving the Federal Reserve (Fed) some leeway in adjusting monetary policy.

Investment Implications

In another report, the control group of retail sales — the category which feeds into the GDP calculations — fell 0.3% in April, suggesting that consumer spending downshifted in the beginning of the second quarter. So, the bottom line is despite this morning’s encouraging inflation report, the Fed will not likely begin cutting rates until they have more confirmation that consumer prices are easing. After digesting this report, markets expect the first cut to come in September. Stocks rose and the dollar weakened after the report.

So where do we go from here? Commodities could benefit from this period of sticky inflation, especially while we have supply and demand imbalances. Lower inflation could help support equities trading at elevated valuations (LPL Research remains neutral equities despite the latest rally). And it probably makes sense to be careful with the retailers as consumer spending softens. Outside the U.S., LPL Research remains constructive on Japan as the country emerges from its decades-long battle against deflation, yet still with accommodative monetary policy.

Dr. Jeffrey Roach | Chief Economist

 

 

 

 

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