The week in review

• Retail sales: +9.8% m/m
• Headline CPI: +0.6% m/m, +2.6% y/y
• Industrial production: +1.4% m/m

The week ahead

• Flash PMIs

Thought of the week
Consumer prices rose in March at their fastest pace in nearly nine years, with the headline CPI rising 0.6% (consensus 0.5%) and the core CPI, excluding food and energy, rising 0.3% (consensus 0.2%). The main contributor to higher inflation in March was gasoline prices, which rose +9.1% m/m. Notably, the report revealed a rebound in core services prices as the U.S. economy reopens, with food away from home increasing 3.7%, while “limited services meals” jumped 6.5% for the year. While the upside surprise in inflation was small, it could be important as it increases the odds that inflation, as measured by the personal consumption deflator, will remain solidly above 2% y/y from April of this year well into 2022. Fed officials have indicated that they expect PCE inflation to average around 2.4% y/y in 4Q21, but that they will regard increases later this year as likely transient. As shown in the graph, the PCE deflation has recently tracked headline CPI closely, and our estimate of the March PCE deflator is now 2.3% y/y. However, if inflation prints continue to run solidly above target, it could create some communication challenges for the Fed. As inflation is expected to rise over the next few quarters, the Fed will certainly be closer to its criteria for raising short-term rates, but more imminently, it will be closer to its criteria for tapering, which simply requires significant progress toward 2% inflation and maximum employment. Investors should continue to manage their duration of fixed income assets carefully and consider the possibility that tapering could happen sooner than the market expects.

Download PDF