6/12/2015
By Jennifer Coombs

There are arising signs of price pressures in May according to the producer price index (PPI), which showed a headline reading ahead of consensus expectations at +0.5%. However, the year-over-year reading remains well in the negative column at -1.1%. The core reading (excluding food and energy) was still pretty benign, up only 0.1% in May which was in-line with expectations and resulted in a year-over-year increase of 0.6%. Both food (+0.8%) and energy (+5.9%) were higher for the month, reversing the declines noted in April. In the foods category, fruits and vegetables both show mid-single digit gains for the month, while gasoline and home heating oil also showed large gains. Inflation remains non-existent in services, which was unchanged for the month and +0.6% year-on-year. Aside from the monthly spikes in food and energy, this report isn’t ringing any alarm bells.

In addition, it’s clear that the retail sales and consumer sentiment reports offer a “one-two punch” that once again works in the Fed hawks’ favor. The University of Michigan noted that consumer sentiment is back on the rise, with the preliminary June index reading jumping 4 points to a reading of 94.6, which is well above the consensus expectation for 91.2. The current conditions component showed a 6-point gain so far this month to a reading of 106.8, which is a great indication for retail sales strength from May into June. The expectations component showed a smaller gain of 2.6 points, but is still quite healthy at a reading of 86.8, and points to confidence in the overall jobs outlook. Although gas prices have been ticking higher, it hasn’t affected the inflation expectation of the report which dropped by 10 basis points to 2.7% for both the 1-year and 5-year outlooks. As the chart below demonstrates, consumer sentiment is back near its best readings of the recovery, and the gain in current conditions continues to be positive for retail sales. The Federal Reserve has been tracking consumer confidence closely, and this is just one more point in favor of the hawks.

Jennifer Coombs
Wall Street Strategies

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