It’s Suddenly Lonely Being a Dove on Fed Policy. So Be It.

Fixed-income markets are back in a tizzy over inflation, thanks to the combination of rising risks for energy prices and strong retail sales data — both of which come on the heels of a higher-than-expected consumer price index last week. Still, it’s important not to conflate the three developments when assessing the prospects for Federal Reserve interest rate cuts, which probably remain in the cards despite the latest sequence of developments.

Yields on 10-year Treasury notes jumped as much as 14 basis points on Monday to 4.66%, the highest in five months, as March retail sales exceeded most economists’ expectations and global oil markets weighed the fallout from Iran’s direct attack on Israel over the weekend. The retail sales report, in particular, gave a fresh boost to the narrative that robust demand is now the main culprit for America’s lingering inflation problem. In fact, there isn’t much of a connection — not yet at least.

In Monday’s retail sales data, online spending was the primary driver of the upside surprise. In nominal terms, online retail rose 2.7% month-over-month, enough to account for about two-thirds of the 0.7% increase in the metric overall. Notably, if inflation were a story of excess demand, you might expect price pressures in the parts of the economy where spending has been strongest, but that hasn’t really been the case, so it’s hard to make the connection. In fact, nondurable goods prices ticked up just about 0.1% in March, and online prices measured in the Adobe Digital Price Index have performed comparably.

Online sales accounted for most of the March strength in retail sales