Retail sales growth likely slowed in March as gasoline prices rose more slowly and new car and truck sales pulled back from February’s level.
Core retail sales excluding gasoline stations and auto dealers likely grew moderately, matching their February pace. Industrial production likely rose modestly in March, as manufacturing activity picked up and offset a decline in mining and utilities. Milder weather reduced heating demand in March, pushing natural gas futures to the lowest in decades.
Building permits and housing starts likely edged lower in March after mild weather fueled increases in February. Residential homebuilding is growing in 2024, but high interest rates are an ongoing headwind to construction financing and homebuyer demand. Homebuilder sentiment likely pulled back slightly in April as mortgage rates rose.
The Consumer Price Index (CPI) rose by 0.4% for the second consecutive month and accelerated on an annual basis from 3.2% in February to 3.5% in March. Core CPI, which excludes volatile food and energy components, increased by 0.4% for the third consecutive month and held steady at 3.8% from a year earlier. Both headline and core inflation were above consensus forecasts. Shelter, up 0.4%, was again the single biggest contributor to inflation, accounting for around two-fifths of the price increases. Led by a 1.7% increase in gasoline prices, energy costs also made a sizeable contribution to inflation.
Prices of services excluding energy and shelter (Sometimes called Supercore CPI) jumped by 0.7% on the month and were up 4.8% from a year earlier. Inflation of services excluding energy and shelter have accelerated since last fall, a concerning development as they account for about a fourth of consumer spending. On a positive note, overall food prices rose by a modest 0.1%, with food at home unchanged for the second consecutive month.
Minutes of the Fed’s March Open Market Committee meeting show a notable contradiction between FOMC members’ assessments of inflation and their monetary policy expectations. While “generally” noting “recent data had not increased their confidence that inflation was moving sustainably down to 2 percent,” monetary policymakers, nonetheless, judged the federal funds rate was “likely at its peak for the tightening cycle.”
“Almost all” FOMC members believed that it would be prudent to loosen policy “at some point this year.” “The vast majority” also judged that it would be appropriate to begin slowing the pace of balance sheet reduction “fairly soon.”
But following the release of the hotter-than-expected CPI print, financial markets generally discounted the FOMC’s forward guidance, and now expect the Fed to hold off on rate cuts until later in 2024, and to make two or even fewer quarter percentage point rate cuts by year-end. On the back of strong receipts, up 22%, and modest increases in spending, up 0.5%, the federal government deficit shrank sharply from $296.3 billion in February to $236.5 billion in March. Midway through the fiscal year, the federal government has run a $1.1 trillion deficit, which the Office of Management and Budget projects will reach $1.9 trillion when the 2023/24 fiscal year concludes on September 30.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
