Inflation drops to two-and-a-half year low
Inflation pressures eased again in April, as energy prices continued their recent downward trend. The Consumer Price Index fell by 0.4%, while the one-year change in the CPI dropped further to just 1.1%, its lowest point since late 2010.
Taking out the more volatile components of inflation (food and energy), core prices edged fractionally higher, rising 0.1%. Nonetheless, the 12-month change dipped to 1.7%, remaining below 2.0% as it has been since August.
Despite the Fed’s aggressive monetary policy stance, disinflationary forces are still prevailing, relegating concerns about inflation to the list of worries down the road.
While progress continues to be made in the jobs market, the still-elevated unemployment rate, sub-par aggregate demand in the U.S., and soft economic conditions outside the U.S. are still keeping inflation at bay.
Continuing disinflationary pressures and slow, unsteady progress on the employment front leaves the Fed well-positioned to maintain its accommodative policy for now. However, the timing and nature of the central bank’s ultimate exit strategy and what that will mean for capital markets continues to be a significant focus of debate
As signs of another economic summer soft patch persist in the U.S., and the Eurozone economy records its sixth quarterly decline, downside risks to global growth still persist. Investors continue to shrug off these concerns, as global equities push higher with the implicit support of central banks at their back. How long will that continue? That’s the question on the mind of many investors, and one for which there is no easy answer.
April Retail Sales up 0.1% on Better Auto Sales
After dropping more than anticipated in March, retail sales increased 0.1% in April, pushing year-over-year growth up to 3.7%. Excluding automobiles, retail sales fell 0.1% during the month, posting a 2.8% gain since April 2012.
If there is good news to be had in today’s report, it’s that the modest deterioration in sales that occurred in March was halted in April, boosted by better auto sales. Excluding auto sales, the story was more troubling though, as sales declined for the second consecutive month after peaking in February.
The strength and resilience of consumers was a broadly positive story driving first quarter growth. That spending advance was funded by a continued decline in the household savings rate. Current household debt levels and terms would suggest a further reduction in savings may be possible. With interest rates so low and debt levels having fallen in recent years, household budgets are less strained and debt service requirements are more manageable.
With labor market conditions slowly healing and income growth still restrained, consumers may have to continue to save less and borrow more at the margins to sustain spending growth. The key may be whether they can do so long enough to successfully bridge the gap until stronger income growth becomes reality.
That will require consumers to remain confident in their personal financial circumstances and maintain a view that the economy will continue to improve in the quarters ahead. Whether or not consumers will be able to do so may be the key to determining the trajectory of the economy for the duration of 2013.
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Japan’s Nikkei rises as G-7 approves stimulus plan (Associated Press)