The economic case for a Federal Reserve interest-rate hike at their next meeting in June just lost its footing.
Two recent U.S. government reports revealed that inflation showed a slight setback in March while at the same time retail sales decreased sharply for a second consecutive month. Labor Department data showed the consumer-price index (CPI) dropped 0.3%, while a measure that excludes energy and food decreased by the most since 1982.
“Both reports would be arguments in a case that a dove would make for why the Fed needs to be more patient,” commented Stephen Stanley, Chief Economist at Amherst Pierpont Securities LLC. “It’s a relatively soft consumer performance in the first quarter, and you couple that with a pretty abrupt halt in the gradual uptrend in inflation.”
Retail sales were down 0.2% last month after a 0.3% drop in February that had previously been reported as a gain, Commerce Department data showed. Six of 13 major retail categories recorded lower receipts for the month of March. Auto purchases dipped 1.2% following a 1.5% slip in the previous month.
While the pullback at retailers highlights a weak first quarter for consumer spending – one that economic experts had already accounted for – the inflation data are what took them by surprise given recent indications that businesses had been regaining pricing power. Additional diminishing price pressures and moderate household demand would cause question regarding whether the economy could bear a move by the Fed to lift borrowing costs as soon as mid-year.
Spending, which accounts for about 70% of the economy, is ripe for increase in the face of steady hiring, healthier household financials and more confident consumers. Income-tax refunds, delayed earlier this year, may also provide stimulus in the coming months.
The recent decline in the CPI was the first in 13, reflecting lower cost goods, such as motor vehicles and gasoline, as well as the costs of services, including mobile-phone communications. The core CPI, which excludes energy and food, dropped 0.1%.
Chief U.S. Economist at JPMorgan Cjase & Co., Michael Ferol, wrote, “Until it gets reversed with stronger inflation data, [the current] number will leave lingering doubts about the popular reflation narrative.” That would present a virtual toss-up at the June Fed meeting regarding a rate increase. Analysts estimate a 57% chance that policy makers will raise their target rate for overnight bank lending.