The Weekly Bottom Line

The second week of May carried a light economic calendar, with primary data releases continuing to center on inflation. The consumer price index (CPI) report showed that inflationary pressures eased a bit in April, falling to 8.3% year-on-year (y/y) – down from 8.5% in March (Chart 1). Base effects are likely to have played a favorable role, as price pressures stemming from supply chain disruptions began to manifest in March and April of last year. 

Beneath the headline, food inflation accelerated both in yearly and monthly terms, whereas energy prices eased a touch. Both, however, remain elevated at 9.4% y/y and 30.3% y/y, respectively. Excluding these two volatile categories, core prices also decelerated modestly, falling to 6.2% y/y from 6.5% y/y in March. However, several important categories bucked the trend. On the goods side, new vehicle prices were higher, while medical care, transportation, and shelter were all meaningful contributors on the services side. The transportation category was buoyed from airfares, which continued to rise sharply (18.6% m/m). Meanwhile, market-based measures of strong home price and rent growth suggest that the weighty shelter component has more upside ahead. This, together with the fact that gas prices have resumed their upward climb this month, and that we’re likely to see further upward pressure in food prices from the war in Ukraine, muddy the CPI report’s headline message that inflation may have peaked, making it prudent to wait for further confirmation to this notion. 

The producer price index (PPI) report echoed a similar message to last month’s CPI numbers. Producer prices were up 11% from a year ago in April, marking an easing from an upwardly revised 11.5% y/y in March. Core PPI also eased a touch. That being said, April’s PPI showings, which are not far off from the March record highs, indicate that inflationary pressures continue to build in the production pipeline.  

The small business report from the NFIB provided more of the same. In Chart 2 we can see that while the share of businesses raising (and planning to raise) average selling prices and worker compensation have eased from recent highs, they remain well above historical norms. On the other hand, the share of businesses identifying inflation as their top business problem reached a new post-1980 high in April. Another striking feature of the report is the fact that the share of small businesses expecting an improvement in the economy in the months ahead fell to a yet new record low (-50%).

Doubtful expectations about a further improvement in the economy have some basis. Signs of a slight moderation in inflation will do little to dissuade the Fed from removing monetary stimulus expeditiously, which in turn will weigh on economic momentum. In tune with this notion, risk assets continued their downward slide this week. Despite a notable bounce back Friday, the S&P 500 is down 2.6% from last week’s close and roughly 16% from peak. Of course, as Fed Chair Powell noted this week, there’s no guarantee that the Fed will see smooth sailing in its goal to engineer a soft-landing. In a speech Thursday, Chair Powell, who was recently confirmed for a second term, noted that getting inflation back to 2% will cause “some pain”.  For now, however, we’re still full ship ahead with another 50-basis point hike in June.           

Admir Kolaj, Economist | 416-944-6318