Inflation Math Inconsistent With Economic Math in Q1 2024

To say that inflation data during the first quarter of the year surprised us and the markets is clearly an understatement and by Tuesday of this week, with the higher-than-expected Producer Price Index (PPI) print for April, markets were clearly on edge as they were also potentially expecting a higher reading for the Consumer Price Index (CPI) on Wednesday. However, markets popped on Wednesday after a weaker than expected inflation number, up 0.3% compared to market expectations for a 0.4% print. Still, the core CPI came in as expected, up 0.3%, which means that core prices need to continue to come down. But we know that markets like something that is in line with expectations, while, at the same time, love that headline CPI inflation came in lower than expectations. On Thursday, we got the Import Price Index, showing a very strong, 0.9%, increase in import prices. Thus, the CPI showed little evidence of a strong pass-through from either import or producer prices into consumer prices, which could be telling if sustained over the medium term, as it would support our view that consumer demand is weakening.

Wednesday also gave us the first look at consumer demand during the first month of the second quarter as we got retail and food services sales, which came in flat in April compared to March. Within this measure, we also got what is called control group sales, which showed a decline in April, down 0.3%. Although the weaker than expected number for headline retail and food services sales was important, the most important information we got from the retail and food services sales report was the negative reading for control group sales as well as the downward revisions to control group sales during the first quarter of 2024 (see our CPI economic release on page 5).

This tends to point to a weaker performance by consumers during the first quarter of the year compared to what was reported in the release of the first estimate for Q1 2024 GDP. But, and more important, it also calls into question the strength in pricing pressures during the first quarter.