US CPI Cools Across All Segments that the Fed Cares About
Economic news and commentary for May 10, 2023
US CPI
The latest release of the US CPI showed that inflation continues to calm, especially in the service sector. The data reveals that CPI grew by 0.4% MoM and 4.9% YoY in April, down from 5.0% YoY in March. First the volatile components, food CPI was unchanged for the second month in a row, with food at home falling by 0.2% MoM, offset by food away from home, which was up by 0.4% MoM. The YoY change in the food index slowed from 8.5% YoY to 7.7% YoY in April. The energy CPI rose by 0.6% MoM in April, but it was still down on an annual basis thanks to a -3.5% MoM decline in March. Natural gas prices fell by -4.1% MoM, while gasoline prices grew by 3.0% MoM, but gas prices were still down by -12.2% YoY.
Core CPI (excluding food and energy) grew by 5.5% YoY (0.4% MoM), falling just slightly from the 5.6% YoY reading in March. Within that, the goods CPI was the fastest growing on the month, up by 0.6% MoM, as used cars and trucks bounced back by 4.4% MoM, and apparel and medical care commodities saw slight gains. Overall, goods inflation was still low, up by just 2.0% YoY in April versus 1.5% YoY in March. In the services sector, the shelter CPI expanded, but at a slower rate of 0.4% MoM, which helped the services inflation rate to fall by -0.5 ppts to 5.8% YoY. Other services segments fell as well, with transportation services down by -0.2% MoM and medical care services down by -0.1% MoM.
The April CPI report is almost entirely composed of good news as inflation trends looked favorable in just about every segment. The moderation in the YoY change in the food index, falling energy CPI on an annual basis, and a slower rate of expansion in shelter CPI were some of these trends, and they all were important factors contributing to the decline in overall inflation from March to April. The only area where prices picked up more than usual was goods inflation, heavily influenced by a bounce in used vehicle prices. However, while goods inflation has picked up, it is still relatively low at 2%. Removing all of what the Fed might consider “the fat” in the index, the "Supercore" index (all items less food, shelter, energy, and used cars and trucks) was up just 0.2% MoM and 4.7% YoY in April, down slightly from 5.1% YoY in March. These data points support a pause in June as there was significant progress made in the areas where the Fed is looking. Its focus should shift to wages and the labor market as it now appears to be the final piece in the inflation puzzle to solve.
Still to come…
10:00 am (EST) - US Atlanta Fed Business Inflation Expectations
10:30 am - US EIA Petroleum Status Report
9:30 pm - China CPI & PPI
Morning Reading List
Other Data Releases Today
German inflation was confirmed at 0.4% MoM and 7.2% YoY in April, down from 7.4% YoY in March. Core inflation was 5.8% YoY and has remained above 5% YoY since December 2022. Food prices were the main concern, up 17.2% YoY.
Italian industrial production fell -0.6% MoM and was down -3.2% YoY. In the first quarter of 2023, production was down -0.1% compared to the second quarter of 2023.
Italy Industrial Production
Another month of contracting industrial production in Italy (ING) - A third consecutive month of contraction confirms the ongoing soft patch in industry, with a divergence between consumer goods and investment goods. A swift recovery seems unlikely in the short term.
US NFIB Small Business Optimism
Small Business Optimism Index pulls back in April, falling to lowest level since early 2013 (TD Bank) - Small business owners were not particularly upbeat in April, with the NFIB confidence measure ticking down on the month and sitting several points below its long-term average. This status quo has changed little since mid-2022. The cautiously optimistic news from today's report is that, so far, the reverberations from the recent banking stress don’t appear to have taken a major toll on overall confidence.
Small Business Optimism Dips to a 12-Year Low in April: Labor Challenges Persist As Inflation Pressures and Credit Concerns Ease (Wells Fargo) - The NFIB Small Business Optimism index fell to 89 in April, the lowest reading since early 2013. For historical context, the headline index bottomed out at 91 in April 2020 during the first months of the pandemic. The index hit a record low of 79.7 in 1980 and fell to 81.6 in 2009 during the Great Recession.
US
U.S. Banks Tightened Lending Standards Amid Industry’s Turmoil (TD Bank) - The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) showed that U.S. commercial banks tightened credit for all major products in the second quarter of 2023.
This Is the Way (John Williams, New York Fed) - The President of the New York speaks at the Economic Club of New York, New York City on inflation and the financial situation.
Europe
European utilities’ commitment to investment remains high (ING) - European utilities are at the heart of the European Union's energy transition plan. Higher operating expenses and the rising cost of debt had cast some doubt on the sector's ambition and ability to maintain investment plans. But targets for 2023 point to further strong progression for capital expenditure.
Flash Comment Riksbank - April 2023 Minutes - Less dovish than the initial impression (Danske Bank) - The initial impression of a dovish turn in the Board’s assessment was not supported by the Minutes. On contrary, all Board members continues to see a risk for further tightening in June and/or September. Additionally the general view of the board members is for a policy rate that remains at a restrictive level for an extended period of time, which stands in contrast to current market pricing.
Riksbank minutes: Cautiously optimistic (Nordea) - The Riksbank minutes was neutral compared to the policy announcement in April. Elevated core inflation remains a main concern, but the board sees increased bright spots that inflation will decline looking forward.
April delivers the first marked drop in Hungarian inflation (ING) - We have seen the first decisive retreat in headline inflation in Hungary, mostly on the back of base effects, while the structure has improved as well. Given that market stability remains intact, we see the door open for cuts in the effective rate in May.
Canada
People and Places (BMO) - The Canadian economy started 2023 with solid momentum, but the full impact of past interest rate hikes and some likely tightening of credit conditions should weigh on growth through the remainder of the year. Real GDP growth is expected at 1.0% this year, with negative prints possible in coming quarters. Growth is then expected to firm to 1.3% in 2024.
Australia
2023 Federal Budget: NAB Economic Commentary (NAB) - Federal Budget 2023 delivered a $4.2bn surplus, and focused heavily on relief – targeting energy bills and the cost of healthcare in a big way.
South Africa
Load shedding programme weakens business capacity and outlook in South Africa in April (S&P Global) - The headline South Africa PMI ticked slightly down to 49.6 in April, from 49.7 in March, to signal a contraction in operating conditions across the private sector economy for the second consecutive month. Historically, a neutral PMI reading of 50.0 has been broadly consistent with annual GDP growth of approximately 1.5%.
PMI
Monthly PMI Bulletin: May 2023 (S&P Global) - The global economic expansion accelerated at the start of the second quarter, buoyed primarily by faster services activity growth while manufacturing performance lagged. Consequently, developments on the inflation front likewise diverged, though a key question for the inflation outlook is how durable the ongoing service sector resurgence will be.
Inflation trends diverge as service sector growth spurt drives global growth to 16-month high (S&P Global) - A further acceleration of services sector growth pushed the pace of global expansion to a 16-month high in April, according to the S&P Global PMI surveys based on data provided by over 27,000 companies. All major economies reported robust service sector growth, in all cases outperforming manufacturing which consequently remained broadly stalled on a global basis.
FX
De-Dollarization: Currency Contenders (Goldman Sachs) - Will the U.S. dollar lose its world reserve status? The U.S. dollar as a share of global central bank reserves has dropped from 72% in 2002 to 58% in 2022 amid a long-standing conversation on de-dollarization.
Construction
Highest Paid Occupations in Construction in 2022 (NAHB) - According to the latest May 2022 Bureau of Labor Statistics Occupational Employment and Wage Statistics (OEWS) and analysis by the National Association of Home Builders (NAHB), half of payroll workers in construction earn more than $54,540 and the top 25% make at least $77,030. In comparison, the U.S. median wage is $46,310, while the top quartile (top 25%) makes at least $73,460.
Outlook
Nordea Economic Outlook: The Inflation Standoff (Nordea) - Can central banks tame inflation without tipping the economy into a recession?
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