KEY DATA: CPI: +0.4%; Ex-Food and Energy: 0.1%; Gasoline: +6.5%; Food: +0.3%/ Real Earnings (Monthly): -0.3%; Over-Year: +1.3%
IN A NUTSHELL: “For the most part, inflation remains tame.”
WHAT IT MEANS: About the only thing that could get the Fed to raise rates would be a jump in inflation and it doesn’t look that is happening. Over the year, consumer price increases are running pretty much at the Fed’s target of 2%, no matter which measure you use. Yes, consumer prices popped in March, led by sharp rises in energy, food and rental costs. However, excluding the more volatile food and energy components, inflation only inched upward. Looking forward, with growth moderating, it is not likely we will see continued large rises in energy. However, the food and shelter components could come in a little higher than the average. And there was some really bad news on the food front: Cake, cupcakes and cookie prices surged. Back to the diet time. Offsetting, to some extent, the pop in gasoline prices was a cratering in apparel expenses. Clothing costs seem to be making a move to be added to the volatile list, so don’t expect this components moderating impact on prices to continue. Thus, while inflation is not likely to surge anytime soon, it could slowly accelerate.
One of the big surprises in the employment report was the minimal gain in hourly wages. With overall inflation rising sharply, that led to a large drop in real, or inflation-adjusted wages. Over the year, real wage growth, which reflects household spending power, decelerated. That said, this was the first time since July 2018 that we haven’t seen real wage gains accelerate, so I am not that worried. Still, with purchasing power growing at a dismal 1.3% pace, it is hard to generate lots of additional household demand. We need to get back to the nearly 2% rise we had in February if household spending is to expand at a decent rate.
MARKETS AND FED POLICY IMPLICATIONS: The Fed effectively went on vacation and is likely to stay there for quite a few more months. Yes, the members will gather, have some good meals, chat back and forth about what is going on what are the risks, but otherwise, don’t expect them to decide to do anything. Which raises the question: Is the next move up or down? The answer, of course, is it depends. If you are an optimist about a pick up in growth over the second half of the year, then up seems possible, especially if inflation rises a touch. By pointing to a rate hike in 2020, the members signaled that they really think the funds rate is still below neutral and they would like to get back there. Of course, they could just revise downward their estimates of neutral, as they have done, and declare victory, but I am not sure that is going to happen. Regardless, if we get back to 2.5% growth, that might be enough for the Fed to get some guts and move the funds rate up a notch. On the dreaded other hand, many see the current slowdown as just a prelude to an even greater deceleration. That would mean inflation would not increase and the Fed could be pressured to lower rates. I still think the Fed is looking for any excuse to get in one more rate hike, so I lean toward that happening. As for the markets, with inflation not an issue, the view that the Fed is on hold for the rest of the year will likely continue to be the prevailing sentiment. And as far as investors are concerned, no Fed is a good Fed.