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US inflation eases slightly from a six-month high

Both headline and core inflation remain above the Fed’s target, although retail sales were flat.

15 May 2024

The Federal Reserve’s (Fed) fraught task of pushing down inflation to target level would feel eerily familiar to anyone who has ever herded cats. April CPI in the US remains stubbornly impervious to current Fed policy action, recording a reading of +0.3% over the month at both core and headline level, to leave inflation on an annual basis at 3.6% core and 3.4% headline, still in a region that is uncomfortably higher than target. It should be no surprise that the Fed’s current narrative is to continue to wait and see but markets will be patient for only so long, and at some point the reality of maybe just one cut this year, if we are lucky, will factor into sentiment and ultimately weigh on valuations.

Retail sales also came in less than expected with zero growth month-on-month, and that probably should not be surprising in that wage growth of late has cooled. An economy that is still relatively strong, driven by consumption that has surprised to the upside lately, should set up more restrictive Fed action if anything, so this monthly print will be seen as a positive, not from an economy perspective obviously, but from the markets’.

The apocryphal quotation attributed to Churchill observed, ‘Americans can be counted on doing the right thing, after they have exhausted all other possibilities’. Is it conceivable that the right thing is to try higher rates to beat inflation and the consumer into submission? This certainly would not be right from a market performance perspective and probably not something the Fed would seriously consider given their recent admissions that rates are very likely at the top of the range. But even if they do not raise rates further but just hold for ever longer, it may be that the ‘sell in May’ adage would make a rare, by recent standards, seasonal comeback if these inflation prints and sales data had worried investors. For now though the sentiment seems to be boosted that inflation has not surprised to the upside and retail sales are on the face of it slowing a bit. The landscape is moderating as they say and that means lower volatility and easier prognostics. All of which means market direction can continue to the upside.

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Charles Hepworth

Investment Director
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