FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Overall inflation as measured by the CPI accelerated to 8.5% year-over-year (y/y) in March, marking yet another multi-decade high. Core inflation, which excludes food and energy, ticked up a tenth of a percentage point to 6.5% y/y.
- Small business confidence continued to trend lower in March as the share of businesses expecting an improvement in the economy fell to an all-time low. Meanwhile, inflation has vaulted into being perceived as the top business problem.
- Retail sales rose 0.5% month-to-month (m/m) in March – broadly in line with market expectations. Excluding volatile categories, sales in the ‘control group’ (used in calculating personal consumption expenditures) fell 0.1% on the month.
U.S. -Inflation Surge Continues
Inflation remained top of mind this week with the Consumer Price Index (CPI) report reminding us once again that price pressures accelerated in March in financial news. Overall inflation rose both in month-to-month (+1.2% m/m) and year-over-year (y/y) terms, with the latter reaching 8.5% in March – a new multi-decade high. Energy, especially, and food, to a lesser degree, both contributed to the acceleration. Still, even when excluding these more volatile categories, core inflation (up only a tenth of a percentage point to 6.5% y/y) was at the highest level since the early 1980s (Chart 1). Adding to the evidence that price pressures continued to build through March, supplier prices also rose sharply last month, accelerating to 11.2% y/y – an all-time high for the data stretching back to 2010.
Inflation worries were echoed in the National Federation of Independent Business (NFIB) small business report. Business confidence continued to trend lower, falling to 93.2 in March – the lowest level since 2016 excluding the temporary drop at the start of the pandemic. Businesses were the most pessimistic they have ever been regarding an improvement in the economy ahead from current levels (albeit the bar to improve on the post-pandemic rebound pace is very high). Yet perhaps the most striking aspect of the report is the fact that inflation concerns, barely a factor as the start of last year, have risen sharply, overtaking ‘quality of labor’ concerns recently (Chart 2). This shift suggests that managing inflation’s impact is now the top priority, while securing talent amidst a tightening labor market playing an important second fiddle.
Small business job openings remain plentiful, despite trending lower since peaking in September. Meanwhile, businesses continue to raise wages and plan more increases ahead, with both of these sub-indicators in the NFIB survey ticking higher last month. A growing share of businesses are also passing on the added costs to consumers by raising prices. A net 72% are doing so – a record high in the survey’s almost 50-year history. All these factors, together with the potential for more supply-chain disruptions due to the war in Ukraine, and shutdowns in China, suggest that inflation will continue to run hot in the near-term.
Tilting to retail sales, a 0.5% gain in March and a bulky upgrade to the month prior were positive developments. Gains in March also appeared to be skewed toward “going out” categories – a pattern consistent with the reopening of the economy. A sharp drop in non-store sales (a proxy for online sales) further bolsters this point. Digging deeper, however, the picture is less rosy. Sales in the control group, which exclude volatile categories and are used in calculating personal consumption expenditures, were down 0.1% m/m. Meanwhile, when adjusting headline figures by CPI, the data points a decline in the ‘real’ sales estimate both in monthly and year-on-year terms.
All told, with inflation running hot and still no major cracks in the economic armor, the Fed will need to follow through with the speedy removal of monetary stimulus to try and rein in inflation. Interest-sensitive sectors, such as housing, which is already showing some signs of cooling (see here), are first on the list to feel the pinch from the higher rate environment.
Admir Kolaj, Economist | 416-944-6318
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