By Lance Gaitan
I write about inflation extensively because it directly affects bond prices.
When inflation rises, bond prices fall, and vice-versa. (And, of course, my readers book profits off those price moves via Treasury Profits Accelerator.)
Wholesale (producer) prices usually foreshadow what’s to come in consumer prices. If it costs more to produce a gallon of milk, then you’re probably going to soon pay more for that milk at the store.
Wholesale inflation, which the Producer Price Index (PPI) tracks, bottomed in November 2015, with a 1.6% year-over-year decline.
PPI looks to have topped in December 2017, with a 3.1% year-over-year increase.
Last Tuesday’s release of April PPI showed a slowdown in both the month-over-month and the year-over-year numbers.
PPI was only up 0.1% on the month versus a forecast of 0.3%. Core PPI (excluding food and energy) was up 0.2% on the month, as expected, but it fell to 2.3% on the year. That number was 2.7% just last month.
Consumer inflation, which the Consumer Price Index (CPI) tracks, bottomed in January 2015 at 0.2% and stayed there until September of that year before a nearly two-year march to 2.75% by February 2017.
Core CPI was much lower than the headline number, and it’s been steadier, seeing as it’s tracked just above or below 2% over the last four years.
Last Wednesday’s release of the April CPI also showed a slowdown in inflation.
The month-over-month CPI was up 0.2% against a 0.3% forecast. Core CPI was only up 0.1% on the month, while a 0.2% increase was expected. Year-over-year core CPI was up 2.1% on the expectation it would rise to 2.2%
The Bank of England (BOE) surprised the market last week by holding steady on its key benchmark rate. In its statement, it acknowledged that first-quarter growth and inflation surprised to the downside. And forecasts for both were revised lower.
The U.S. Treasury also held a $17 billion 30-year bond auction late last week, which went very well. Yields on the lot fell to 3.13%. The market reacted by buying up long-term Treasury bonds, which pushed yields lower.
The bottom line is that producer prices are cooling off while consumer prices are moving up, albeit more slowly than expected. Inflation was starting to rise throughout Europe, but it may be backing off there as well.
Inflation rises when the economy is getting stronger.
Wages rise when corporate profits move higher.
With such lackluster moves in CPI and PPI, does that mean prices and wages have peaked?
Will the economy continue to grow?
April retail sales suggest “maybe not.”
Consumers certainly aren’t spending the way Wall Street expects them to. The consensus saw a 0.5% increase coming. What it got was 0.3%.
These numbers are extremely important: Retail sales account for about half of all consumer spending. And consumer spending is two-thirds of the U.S. economy.
If it slows down, so will the economy.
There will be no upward pressure on prices, and wages won’t go up.
That’s bad news for everyone.
You can make it better, though, and profitable with Treasury Profits Accelerator.
Good luck out there,
Lance