CPI moderates, Retail sales misses with revisions

Headline CPI fell .3% m/o/m and .1% at the core level, both 3 tenths below the forecasts. The y/o/y gain was 2.4% vs 2.7% in February and the core rate slowed to 2% from 2.2%. Energy prices fell 3.2% m/o/m as we start the other side of the rate of change process but the y/o/y gain was still 11%. Gasoline prices in particular led the decline but prices also fell for fuel oil, electricity, and utility gas service. Food prices though were higher by .3% m/o/m which was the biggest one month move in a while with gains in food at home and food away from home. Rents showed its persistence as Rent of Primary Residence was higher again by .3% m/o/m and 3.9% y/o/y. The faux look at rents (asking people who own a home what they can get if they rent, like they would know…) was higher by .2% m/o/m and 3.5% y/o/y. With all the multi family building going on, rents in certain markets have been moderating but mostly in NY and SF. Medical care costs rose just .1% m/o/m but are still higher by 3.5% y/o/y. Overall services however ex energy (60% of CPI) fell .1% m/o/m which breaks a long string of .2-.3% monthly gains. This brings the y/o/y gain to below 3% at 2.9%.

Also keeping lid on prices was the decline in car prices. It’s been non stop talk about what’s going on in the auto industry over the past month, so I don’t need to repeat it here, and it showed up in pricing as used car prices fell .9% m/o/m and a large 4.7% y/o/y. This of course creates problems for the pricing of new cars which fell .3% m/o/m and were basically flat y/o/y. And this auto sector challenge is just beginning. The other problem in retail is of course apparel and prices here fell .7% m/o/m but were up .6% y/o/y. Overall, the core goods side of pricing (19% of CPI) was lower by .3% m/o/m and .6% y/o/y.

Bottom line, services inflation, goods deflation remains the trend and the moderation in services for the 1^st time in a while resulted in the sharp 3 tenths miss both headline and core. As for the headline read, the rebound in energy prices y/o/y will start to flatten out by June and thus impacting the data by then. The core rate will still be driven mostly by services but the decline in car/truck pricing is now a must watch on the goods side. Within services, we must keep an eye on any rent moderation due to all the building going in many markets. I seen no reason for medical care costs to moderate anytime soon. As for the Fed, I want to highlight the nonsense of focusing on rate of change when it comes to inflation statistics and their y/o/y target of 2%. That said, it’s what they do and interest rates are still well below the rate of inflation but we know any drops in inflation from here will throw up in the air their entire rate hiking plan. This is a chart of CPI, aka the cost of living, going back 30 years:

Core retail sales (ex auto’s, gasoline and building materials) in March were two tenths above expectations with a .5% m/o/m rise but it was completely offset by a 3 tenths downward revision to February that saw a decline of .1% and January was revised down by one tenth. Sales ex auto’s and gasoline missed the estimate by 2 tenths and February was revised down by one tenth as was January. Under the hood, motor vehicle/parts sales fell for the 4^th month in the past 5 by 1.2% though the y/o/y gain was 5.6%. Also of note, sales at restaurant/bars were down for the 3^rd month in 4 and the y/o/y gain slowed to 4%. We know it’s been cheaper to eat at the supermarket than out. Online retailing continued to be solid as sales here grew by .6% m/o/m and 11.4% y/o/y. For the first time in a while department store sales grew m/o/m, with a slight .2% gain but the y/o/y decline was still 5.2%. After a solid February driven by mild weather, building material sales fell 1.5% m/o/m but are still up a good 6.3% y/o/y. Sales of clothing rose m/o/m but are still down vs last year.

Bottom line, I expect a slight downward revision to Q1 GDP estimates with the data on core sales for the three months. The Atlanta Fed GDPNow we know is already near flat line for Q1. On a y/o/y basis in March they were higher by 4% which is above the 5 yr average of 3.4% but as seen in the chart, still below the 5% trend seen in 2014/2015 notwithstanding all the post election euphoria reflected in the consumer confidence figures.