13 May 2011 Prices Up Again
Prices are rising where we notice them the most; the grocery store and the gas pump, so it feels like inflation is rearing its ugly head again. On an unadjusted annual basis, headline inflation was up 3.2% in April while the core (excludes food and energy) was up 1.3%. A headline rate of 3.2% is not unusual for recent history. It peaked once in 2008, reaching 3.8%, but has not sustained highs much above 3% since the 70’s and late 80’s.
The Fed has not expressed significant enough concern to increase interest rates for fear of stalling the recovery. They say the recent acceleration in food and energy will be temporary citing the slow pace of economic growth and the lack of wage pressures in their reasoning. Commodity prices have fallen since the end of April, due to concern that rising interest rates in countries like China and India will slow the global economic recovery. Crude oil has dropped 13% so far this month.
Prices at the producer level for last month also came in at the high end of the band due to the run-up of commodities over the past several months. Overall PPI inflation in April increased 0.8%, following a 0.7% jump in March. Energy increased 2.5% after a 2.6% advance in March. The main culprit was gasoline which rose 3.6% in April, following a 5.7% surge the month before. At the core level, PPI growth held steady at 0.3%. The annual PPI, in April came in at 6.6%, compared to 5.7% in March (seasonally adjusted). The core rate edged up to 2.1% from 2.0% the month before.
Economists worry about pass-through of higher prices from producers on to consumers. If manufacturers are able to increase their prices and consumers pay them, higher prices tend to stick and inflation gains a foothold. The rise in prices for consumer goods recently might, to a certain extent, be a function of higher import prices for petroleum which rose another 7.2% in April and 37% for the year.
Despite higher prices, especially in gasoline, consumer spending remains healthy. Overall retail sales in April gained 0.5%, following a revised 0.9% (was 0.4%) increase in March. Excluding autos and gasoline April retail sales posted a modest 0.2% gain, following a 0.7% jump the prior month (originally 0.6%).
Consumer confidence as measured by Thomson Reuters/University of Michigan climbed more than forecast in May as Americans turned more hopeful that employment gains will hold helping them cope with higher food and gasoline prices. The preliminary consumer sentiment index rose to 72.4, a three-month high, from a final reading of 69.8 in April. The number points to continued consumer spending growth, but modest. The best of all confidence indicators, the S&P 500, reinforces the plodding recovery theme as it has traded roughly in a 2.5% trading range since April 21st.
The weekly report on jobs was again positive. Initial claims for unemployment fell sharply by 44,000 in the May 7th week to 434,000. The prior week was revised to 478,000. But despite the decline, the current monthly level remains well above March’s four-week average of 436,750.
As of last Friday, 422 companies of the S&P 500 (84%) had reported first quarter earnings. Of those 76% were higher by an average of 35.4% and 215 were lower by an average of 25.4%. Two thirds of companies reporting so far have surprised analysts on the upside, while only 21% disappointed.
For now it appears the economy has sufficient momentum to drift through the coming doldrums of summer. We might even hope for some unexpected propelling breezes as the housing market nears its prime selling season. Wouldn’t that be welcome news? Have a nice weekend.
