Inflation Trends Increase Stagflation Odds
The CPI report came in as expected, rising by 3.6% year-over-year on the core and 3.4% on the headline. Core CPI also rose by 0.3% m/m in line with expectations, while CPI m/m came in at 0.3% vs. 0.4%. The data continues to point to the same trends we saw before the release of the data. CPI and Core CPI are not running at trends consistent with a 2% inflation rate, and today's data did little, if anything, to change that. It may have confirmed those trends. The CPI, on a seasonally adjusted basis, has been running at an annualized growth rate of 3.6% over the past 20 months, and today's result came in right on trend. Additionally, the CPI has risen at a 4.4% annualized growth rate over the last four months. Even when looking at the CPI on a non-seasonally adjusted basis, it has been rising at an annualized growth rate of 3.5% over the past 20 months and also came in right on trend. Core CPI seasonally adjusted has now risen at an annualized growth rate of 4.0% over the past 19 months. Core less housing has also been running at a 5.3% annualized growth rate for the past 31 months. Of course, the trends can change, and if monetary policy is really restrictive, the trends should shift to a lower slope over time. Now, the last time the Fed raised rates was in July 2023, and one would think that if the path doesn't change soon, the current path suggests that policy is not yet having the desired effect, at least on inflation, and may not be tight enough to actually alter the path. How long a trend must persist before it's accepted as a problem or entrenched is unclear. However, a trend that continues for as long as these have already continued appears to be worth considering as a problem. Meanwhile, retail sales have disappointed, coming in flat versus expectations for a gain of 0.4%. Last month's figure was revised lower to 0.6% from 0.7%. The slower sales and the 3.5% trend inflation rates over many months again point to a stagflation-like environment developing in the economy. The seasonally adjusted retail sales index has flattened out since the fall of 2023. There appears to be a strange dynamic occurring across the economy with high service inflation and core and headline CPI stuck in an uptrend running in the 3.5% to 4% range while retail sales are stagnant. Overall, the idea of a stagnating or stagflationary economy is becoming increasingly real.
