Inflation, the Fed, and Retail Sales: Five Key Takeaways from Last Week’s Data
Equity markets fell over 2.0% last week, as market sentiment seemed to turn lower after a more hawkish Fed meeting and weakening retail-sales data, and despite better-than-expected CPI inflation data for November. Overall, the Fed (and global central banks) remain vigilant for now, but as inflation moderates and the economy softens in the months ahead, there may be less need for peak restrictive policy. While this transition may take some time, and markets could be more volatile in the near term, we may see a better market backdrop as we head toward the back half of 2023. We discuss five key takeaways from this week’s data and our outlook on each below.
1. Consumer price index (CPI) inflation came in cooler than expected: We believe inflation will continue to moderate through 2023
CPI inflation data for November came in below expectations, with headline inflation of 7.1% year-over-year versus expectations of a 7.3% figure. Core inflation came in at 6.0%, also below forecasts for 6.1% and lower than last month’s 6.3%. Overall, inflation is trending in the right direction, although CPI remains elevated and well above the Fed’s 2.0% target. Goods inflation continues to ease, with areas like used cars, apparel and even toys showing moderating price pressures. Parts of services inflation, including medical and transportation services (like airline fares), were lower this month. However, core shelter and rent prices in the CPI basket remained elevated. In our view, the CPI shelter and rent components remain lagging indicators, and leading and coincident indicators of the housing and rental markets are notably weakening. For example, as mortgage rates have risen, we have seen downward pressure on both home prices and rental prices. Over time, we believe that the core CPI index will reflect the weakening in housing and rental markets as well, and we could see core inflation head towards 3.0% by year-end 2023.
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