Retail Sales and CPI

  • Overall retail sales were stronger than expected, rising 1.6% in March (in addition, February retail sales were upwardly revised to 0.5% from a previously reported 0.3%). Retail sales excluding autos rose 0.6% in March (also stronger than consensus forecasts) and February saw an upward revision to 1.0% from 0.8%. Gains in the major categories of retail sales were broad based in March.
BOTTOM LINE: Although possibly boosted by seasonal adjustment issues related to Easter, March retail sales were strong and consumer spending appears to have posted a solid gain of around 3½% in inflation-adjusted terms in the first quarter. Over the last three months, most categories of sales have posted double-digit annualized gains (with the exception of gas stations and food stores). Particularly notable has been the strength in autos, apparel, and restaurants and bars. With inventories still low in many areas, strength in the consumer should encourage inventory building and production. However, we still believe we need job creation to be sustained to maintain this strength in the consumer. 

42% of the CPI is Owner Equivalent Rent and actual rent. So while rents are falling (as they are now), so will the CPI. Other sources support this theory. See below:
 Source RDQ
  • Core CPI prices were lower than forecasts, remaining unchanged in March. The year-over-year core CPI inflation rate slowed to 1.1% from 1.3% (and core CPI prices have fallen 0.2% at an annual rate over the last three months). Overall CPI prices were in line with consensus expectations, rising 0.1% in March (however, the year-over-year headline CPI inflation rate picked up to 2.3% in March from 2.1% in February).
BOTTOM LINE: There was no inflation in the CPI in the first quarter since core CPI prices fell slightly from December to March and overall CPI inflation was a mere 0.9%. While we think that this is no indication of future inflation trends (indeed other inflation measures, which do not include imputed owner-occupied rent, do not support the inflation slowdown story), the Fed is likely to use the CPI data as a reason to maintain the extended period language (indeed subdued inflation is one of the three factors that the Fed believes warrant the use of this language). Gold and commodities are on the upswing again and the dollar is weakening and we continue to believe that these indicators point to inflation problems ahead. Bernanke and the Phillips-Curvers at the Fed have a different view.


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