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Key Points for the Week

  • Consumer prices climbed 1.2% last month, and energy and food contributed nearly 80% of the gain. Excluding energy and food, core CPI increased only 0.3%.
  • Inflationary pressures remain strong, evidenced by ongoing strength in the Producer Price Index (PPI), import prices, and Chinese producer prices.
  • U.S. retail sales rose 0.5% last month but fell when the effects of higher prices are removed. Sales are 7% higher and 17% above the pre-pandemic trend.

Determining how quickly prices are rising or falling – and where they may be headed in the future – is not simple. In the United States, millions of goods and services are bought and sold every day – shelter, food, transportation, energy, water, education, childcare, equipment and tools, medical care, furnishings, apparel, trash removal, and much more.

The government relies on two indexes: the Consumer Price index (CPI) and the Personal Consumption Expenditures Index (PCE). Each index has two versions: headline inflation and core inflation.

Last week, the Bureau of Labor Statistics (BLS) reported that CPI headline inflation was up 8.5 percent in March, and CPI core inflation was up 6.5 percent.

The BLS does not collect every price in every part of the United States. It gathers prices in 75 cities, collecting data from about 6,000 households and 22,000 department stores, supermarkets, hospitals, gas stations, and other establishments. So, the CPI is a measurement that reflects the experience of urban consumers.

CPI headline inflation

Last week, the CPI showed that headline inflation, which includes all price changes collected, was up 1.2 percent from February to March, and up 8.5 percent for the 12-month period that ended March 31st. The largest increases in the CPI were:

  • Used cars and truck prices +35.3 percent
  • Energy prices (fuel oil, gasoline, natural gas, etc.) +32.0 percent
  • New car prices +12.5 percent
  • Food prices (groceries and eating out) + 8.8 percent

CPI core inflation

The BLS also reported on core inflation, which is the CPI minus food and energy prices, and was lower than headline inflation. The core CPI was up 0.3 percent from February to March, and up 6.5 percent for the 12-month period that ended March 31.

Why would anyone want to exclude staples like food and energy from inflation?

The answer is that food and energy prices are volatile – food and energy are commodities that trade on exchanges – and can distort inflation readings. “Trying to manage monetary policy with gauges that fluctuate wildly would be like driving a car where the speedometer was constantly fluttering between 30 mph and 60 mph. Taking a long-term average may reduce the effect — but only for looking at the past history. Policymakers are forward-focused. They need guidance on where the inflation trend is headed. High volatility obscures that trend,” explained George Calhoun of Forbes.”

To sum up: headline CPI reflects Americans’ cost increases in the recent past, while core CPI is a better indicator of where inflation may be headed, reported Joseph Haubrich of the Cleveland Federal Reserve.

It’s important to note that the Federal Reserve relies on the PCE when making policy decisions. The PCE is a broader measure of inflation than the CPI. The PCE includes measurements taken in urban, non-urban, and rural areas, as well as spending by members of the military and a wider range of organizations. PCE data for March will be released on April 29.

This Week in the Markets

The Consumer Price Index (CPI) climbed 1.2% last month and has now risen 8.5% in the past twelve months. Energy and food prices were the main culprits, contributing 80% of the overall increase. Food prices jumped 1.0% and have now risen 8.8% in the last year. Used car prices declined last month, otherwise the data would have been worse. The decline in used car prices helped contain core CPI, which excludes food and energy and only increased 0.3%. Housing, airfares, and lodging were all contributors to higher prices.

Inflation indicators with predictive value suggest the inflation run is likely to continue. Producer prices, which affect the prices of finished goods, rose 1.4% last month. Headline PPI is now up 11.2% in the last year. Import prices increased 2.6% in March, the largest monthly increase in more than 10 years. Chinese producer prices rose 1.1% in March, suggesting higher import prices will likely continue.

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U.S. retail sales rose only 0.5% last month. Inflation increased 1.2%, therefore, real sales (sales less inflation) dropped 0.7%. This means that actual sales volume declined. Inflation is acting as a headwind to retail sales growth. As the economy opens up, internet retail sales have fallen 6.4% while general merchandise stores have experienced a 5.4% increase in sales.

Stocks reacted negatively to the various releases last week. The S&P 500 and MSCI ACWI both slid. The Bloomberg U.S. Aggregate Bond Index also declined, as high inflation pressured bond prices. U.S. economic releases will be relatively quiet this week. We’ll be watching international inflation trends for any differences between the U.S. and other markets.

Economic Strength

Economic strength is the biggest reason not to expect a recession in the near-term. Using a three-month rolling average, the U.S. economy has produced more than 500,000 jobs per month for nine consecutive months. A recession would have to include slowing employment growth, and so far the economy has remained strong.

Concern for a near-term recession also ignores the fact that current interest rates are still stimulative. Assuming the Federal Reserve hikes rates by 0.5% at each of the next two meetings, short-term rates would still be between 1.25% and 1.50%. Rates that low are likely still stimulative to the economy. Policy isn’t close to being too tight. The most plausible scenario for a near-term recession is a decline in the European economy because of economic sanctions. Europe is relatively small and more precarious financially to further increases in energy prices (or a shortage of energy) Sanctions could provoke a further jump in energy prices thus lowering global economic activity. Recent downgrades for expected GDP growth suggest a slowing in Europe is already having an impact.

People are worried about a recession because inflation is strong, and the last time inflation was this high the Fed raised rates and caused a rare double-dip recession during which the economy fell back into recession shortly after recovering from the initial recession. Recent yield-curve inversions have fed into this concern. Inversions occur when a bond with a longer maturity has a lower rate than a bond with a shorter maturity. Many people believe yield curves signal a recession is likely because the Fed will raise rates higher than the economy can sustain.

This is the real issue and the real risk. Economists agree recession risks are increasing. In a recent survey by the Wall Street Journal, economists raised the risk of recession in the next 12 months from 18%, which is where it was in January, to 28%. The primary concern is inflation becomes too embedded in the economy, so the Fed has to raise rates above its long-term targets to wring inflationary pressures out of the economy. The high rates limit capital activity and send the economy lower.

It would be a fair question to ask: “If the Fed sees it is raising rates too much, why doesn’t it just quickly reverse course and keep the economy out of a recession?” That is what Fed members hope to do, but predicting how rate increases will affect the economy is challenging because rate increases slow some activity immediately while other activities gradually adjust. For example, when the Fed raises rates, credit card rates move up almost immediately, slowing spending and reducing inflationary pressures. But building projects that have already started are likely already funded, so they will keep going because the higher rates don’t affect them. While fewer new projects are started, it takes a while before existing projects are finished, and some of the inflationary pressure abates.

That’s why we generally agree with the Fed’s decision to raise rates more quickly and get them closer to neutral sooner. Once there, the Fed should consider slowing down the pace of rate hikes to see how the economy is tolerating higher rates. In 2019, the Fed reversed nearly all of its hikes from 2018, and the economy would have likely avoided a recession if it hadn’t been for COVID-19. While difficult, we believe the Fed is well situated to meet the challenge. Getting rates to the lower end of neutral and then slowing rate increases seems the best way for the Fed to pull off a “soft landing” for the economy.

IRS Issues Identity Theft Warning

The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.

Text Message Scams

If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to with the below information:

  • Date/time/time zone the text message was received.
  • Phone number that received the text message.
  • Do not click on links or attachments from suspicious or unexpected messages.

E-mail Phishing Scams

Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to by sending the suspicious email as an attachment.

Phone Scams

The IRS (and its authorized private collection agencies) will never:

  • Call requesting immediate payment using prepaid debit cards, gift cards, or wire transfer.
  • Threaten to arrest a taxpayer by bringing in law-enforcement or local police.
  • Demand taxes be paid without the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone

Unemployment Fraud

Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:

  • Mail from a government agency about an unemployment claim or payment they did not file.
  • An IRS Form 1099-G reflecting benefits that were not expected or received. The form itself may also be from a state for which the taxpayer did not file for benefits.

For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.

The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:

  • Respond immediately to any IRS notice and call the number provided.
  • Complete IRS Form 14039 (Identity Theft affidavit).
  • Continue to pay their taxes and file their tax return, even if it must be done by paper.
  • For specialized assistance, call 1-800-908-4490.

If you have any questions about this information, please contact us.

Did you Know? This Week in History

April 20, 1841: First Detective Story is Published

On April 20, 1841, Edgar Allan Poe’s story, "The Murders in the Rue Morgue,” made its first appearance in Graham’s Lady’s and Gentleman’s Magazine. The tale is generally considered to be the first detective story.

The story describes the extraordinary “analytical power” used by Monsieur C. Auguste Dupin to solve a series of murders in Paris. Like the later Sherlock Holmes stories, the tale is narrated by the detective’s roommate.

Following the publication of Poe’s story, detective stories began to grow into novels and English novelist Wilkie Collins published a detective novel, The Moonstone, in 1868. In Collins’ story, the methodical Sergeant Cuff searches for the criminal who stole a sacred Indian moonstone. The novel includes several features of the typical modern mystery, including red herrings, false alibis and climactic scenes.

It wasn’t until 1887 that Sir Arthur Conan Doyle’s novel A Study in Scarlet was written and introduced the first appearance of the famous detective, Sherlock Holmes. In the 1930s, what is sometimes called the golden age of detective stories, the noir detective novel became the mainstay of writers like Dashiell Hammet, Raymond Chandler, and Mickey Spillane. Tough female detectives such as Kinsey Millhone and V.I. Warshawski became popular in the 1980s.

Weekly Focus

The smallest act in the most limited circumstances bears the seed of boundlessness, because one deed, and sometimes one word, suffices to change every constellation.

Hannah Arendt, Philosopher and Author

An onion can make people cry, but there has never been a vegetable invented to make them laugh.

Will Rogers, Actor and Social Commentator