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Market Update

Inflation slows but consumers still feel pain

April 17, 2023
  • Benjamin Clark headshot


    Ben Clark


    Corporates | Kennett Square, PA


Inflation slowed in March, as CPI and PPI both came in below market expectations. Elsewhere, retail sales fell sharply while the U.S. dollar weakened.

CPI slows in March

The Consumer Price Index (CPI), the headline measure of inflation in the U.S., came in below market expectations for March. CPI rose by 0.1% over the month and by 5% from a year ago, lower than expectations of 0.2% and 5.1% respectively. The 5% year-over-year measure is the lowest since May 2021, a welcome step in the fight against inflation for the Federal Reserve.

Shelter headlined increases in March, rising by 0.6%. Elsewhere, the energy index decreased by 3.5% and by 6.4% annually, while food remained unchanged from February but still remains up 8.5% annually. Within the food index, however, food at home fell by 0.3%, the first drop in almost three years.

Richmond Fed President Thomas Barkin spoke on Wednesday after CPI numbers were released, saying, “It was pretty much as expected,” and “…there’s still more work to do….” San Francisco Fed President Mary Daly agreed, saying, “While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do.…”

Core CPI, which excludes the food and energy sectors, increased 0.4% month-over-month and 5.6% year-over-year, falling in line with market expectations.

Source: FRED

PPI well below expectations and retail sales dwindle

The March Producer Price Index (PPI), a measure of average change over time in selling prices received by producers, fell drastically below market expectations of no change, declining by 0.5%. PPI remains up 2.7% from one year ago, but this marked the smallest annual increase since January 2021.

Prices of goods fell by 1% in March, highlighted by a 6.4% drop in energy. Prices of services fell by 0.3%, the largest drop since April 2020. The decline in services was highlighted by a 1.3% decrease in transportation and warehousing.

Core PPI, which excludes food and energy, increased by 0.1%, below expectations of a 0.3% increase.

Despite cooling inflation, March retail sales decreased by 1%, significantly more than the market expected. The 1% decline is the largest since October 2022 and marks a month-over-month drop in four of the last five months. Notable spending declines in March included -5.5% at gas stations, -2.1% at electronics and appliance stores, and -1.6% at auto dealers.

Small business optimism declines and the dollar weakens

The March NFIB optimism index, which provides a snapshot of small business health in the U.S., decreased by 0.8 points to fall to 90.1. March marks the 15th consecutive month that the index has come in below the 49-year average of 98. Inflation is weighing heavily on the minds of small business owners, as 24% reported that inflation was their single most important business problem, down 4% from February. Although the index decreased from February, it came in higher than market expectations of 89.

The U.S. dollar weakened on the back of signs that the economy is cooling off. With lower-than-expected CPI and PPI data, the likelihood of more Fed rate hikes has decreased. The DXY Index hit a multi-month low, finishing the week at 101.55. Many U.S.-based multinationals are viewing sustained dollar weakness as a potential trigger to protect higher foreign earnings with hedges.

The week ahead

A slower week of economic data lies ahead. March housing starts are published on Tuesday, while March existing home sales are published on Thursday. The market will have its eye on the U.S. dollar to see if it can reverse the weakening trend.

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