Stalling disinflation & robust growth: a look at the latest PPI and retail sales data

More hot inflation data has seen markets react more significantly to stalling disinflation. Despite many interpreting US retail sales data as being weak, a deeper look at the data suggests otherwise.

Producer Price Index (PPI) update

Given my expectation for CPI services price growth, and core CPI growth on a 3- and 6-month annualised basis to remain materially elevated in February, prior to this week’s US CPI report, I outlined in my US CPI Preview that I saw “the greater risk as slanted towards a potential reversal of recent interest rate cut expectations and related trades”.

I also noted that there was likely to be “growing concerns surrounding the potential for CPI growth to sustainably hit 2% YoY, and whether disinflation may instead be stalling at a YoY growth rate of 3% or above.”

While there was indeed some reversal of expectations for an interest rate cut by June on the back of CPI growth coming in above consensus expectations for a second consecutive month, which saw 10Y government bond yields rise, in my US CPI Review, I noted that “I am somewhat surprised that there wasn’t a larger market reaction, as CPI disinflation has clearly stalled at above 3% YoY.”

Focusing on inflation alone, I noted “a growing risk that the first rate cut may not come until 2H24, and that there may be fewer than three rate cuts delivered in 2024 — [which] points to the potential for a significant revision to the market’s expectations for rate cuts” which in the shorter-term “may result in material shifts in US bond yields”.

It didn’t take long for a more material shift in future federal funds rate expectations and bond yields to occur, with the latest PPI data solidifying concerns amongst market participants that disinflation is stalling.

In light of this backdrop, let’s unpack the latest PPI data in greater detail, and then discuss: the potential implications for the Fed; whether or not there is likely to be any further material near-term shift in the market’s interest rate expectations; and the related implications for the broader US economy.

Monthly headline and core PPI growth remains elevated in February

For the second consecutive month, the headline PPI saw a significant increase, rising by 0.56% MoM, or 6.9% annualised.

On a 3-month annualised basis, growth rose to 3.3%, while 6-month annualised growth fell to 1.5%.

Though it’s important to note that a material part of the headline increase was driven by energy, which rose 4.4% MoM.