Good News On Inflation But A Recession May Be Hard To Avoid

Published Friday, April 14, 2023 at: 7:04 PM EDT

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Retail spending by American consumers slowed in March for a second consecutive month, adding to recent signals that the economy is slowing as the Federal Reserve’s tightening monetary policy appears to be having its desired effects. The Census Bureau’s advance estimates of U.S. retail and food services sales for March 2023, adjusted for seasonal variation but not for inflation, declined by -1% from the previous month. 

Retail sales gained 2.9% since March 2022, before accounting for inflation. With real retail spending dropping about -2% in the past year, the main engine of U.S. economic growth is shrinking, and that makes a recession more likely.  

The Fed has raised its benchmark lending rate nine times since March 2022 in its effort to fight the biggest inflation threat in over four decades. The banking crisis that erupted last month has receded due to swift Fed action to shore up small and medium-sized banks, but it has made a recession more likely and complicated the U.S. central bank’s challenge to quash inflation without causing a recession.

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Shoppers pulled back on purchases of items such as vehicles, furniture and appliances amid climbing interest rates. Overall purchases at stores, restaurants and online declined a seasonally adjusted 1% in March from the prior month, the Commerce Department said Friday. Consumers also spent less on gasoline, reflecting a downward trend in prices. 

The consumer price index (CPI) for March was released Wednesday and it showed some good news: Inflation declined from a 12-month rate of 6% in February to 5% for the 12 months through March. In addition, the CPI declined to one-tenth of 1% in March, following a half-point and 0.4% reading in January and February. 

However, when you strip out food and energy prices, the core rate of inflation for the 12 months through March declined, but not by as much as the headline CPI rate CPI measure of inflation. The decrease in headline CPI index of inflation was largely attributable to a decrease in gasoline prices since the Ukraine invasion on February 23, 2022. 

The stubbornness of inflation excluding the cost of energy and food indicates more tightening might be needed to wring inflation expectations from the U.S. economy. 

“Core and headline inflation remain far too high, and we don’t really expect the inflation story to go away,” said Erik Lundh, an economist at The Conference Board at a webinar for C-suite executives at large companies. “We’re forecasting a 3% inflation rate toward the end of 2023 and the Fed might get closer to its 2% target towards the end of 2024.” 

The Conference Board expects a recession to begin this quarter, with real quarterly gross domestic product shrinking -1.8% in the second and third quarters of 2023 and by -0.6% in the final quarter of 2023 before a new expansion begins in the first quarter of 2024. 

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The S&P 500 stock index closed Friday at 4137.64, down -0.21% from Thursday, and up +0.79% from a week ago. The index is +84.93% higher than the March 23, 2020, Covid bear market low and down -13.74% from its January 3, 2022, all-time high. 

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This article was written by a professional financial journalist for Taylor Wealth Management and is not intended as legal or investment advice.

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