The Price is (Not Yet) Right: Signals from the Latest Inflation and Spending Trends

DEWITT, Mich. - April 18, 2023 - PRLog -- Key Takeaways:

• Last week brought encouraging data on inflation, signaling consumer prices remain on a path of moderation after rising to multi-decade highs last year. We think moderating demand and improvement on supply chain disruptions will foster lower inflation as we progress through the year.
• At the same time, the latest retail sales report provided evidence that the consumer is losing a bit of steam. The labor market remains healthy, but is showing some emerging signs of softening, which is likely to drive slower consumer spending as we advance.
• The combination of moderating inflation and a decelerating economy will, in our view, provide the conditions for the Fed to move to the sidelines in coming months, ending its aggressive rate hike cycle. This won't completely stave off the economic slowdown, but we do think this is a positive development for the stock market as the conclusion to monetary tightening phases is traditionally a favorable catalyst.
• Stocks have added to year-to-date gains despite recent recession worries. We expect renewed volatility as additional evidence of a slowdown emerges, but we think markets continue to make progress toward what will ultimately prove to be the foundation of a new, sustained expansion and bull market.

The chain pulling the markets around over the past year has been tightly linked in the following sequence: Inflation is prompting Fed policy → Fed policy is driving interest rates → interest rates are impacting consumer spending → consumer spending is steering the economy → the economy will shape corporate earnings à corporate earnings will guide market performance.

This relationship was on display last week with the release of the latest consumer price index (CPI) and retail sales reports sharpening the focus on the relationship above, which continues to be dictated by inflation conditions. Put simply, high inflation has required restrictive rate hikes, which has weighed on the economy along with stock and bond prices. Last week brought encouraging news on the inflation front, but further progress will be required before the Fed or the financial markets can take a victory lap. Nevertheless, equities added to their year-to-date gains last week as stock prices cheered the move in consumer prices.