Retail sales were lower than expected in May as they slipped 1.3% vs. an expected decline of 0.8%. The primary reason for the slide is due to falling car sales that has been the result of massive chip shortage that are key components in the production of cars. Further, building material sales also slid due to the severity of the lumber shortage. Also contributing to market weakness was an elevated PPI which came in at 0.8% in May vs. an expected 0.5%. Note, wholesale prices surged 6.6% year over year which is the highest EVER recorded. Food prices were up 2.6% in May and energy prices were up 2.2%. Both food and energy prices are on track to post the highest level since 2014.
So, inflation is out there...it could be ugly but we really won’t know if inflation is “transitory” or not until sometime in September. Why September? Because we want to see if crude oil prices fall when crude demand wanes. Typically, crude demand wanes on a global scale in September as there is more people living in the northern hemisphere than southern hemisphere and there is significant driving demands in the U.S., Canada, Europe, and Russia during summer travel months. The travel tails off in September and this is when crude oil demand peels back when the weather cools off.
I expect the Fed to be a bit dovish due to soft retail sales and continued labor market problems. We can also expect that the Fed will need more inflation data points that have some supply shortage issues resolved before it contemplates a rate increase or a slowing of bond purchases.
Kim W. Suchy
CEO, Cornerstone Asset Management Group, LLC