What I Saw Last Week

Inflation – as measured by the Consumer Price Index – rose by 0.2% in May with the core rate up by 0.2%.  I had forecast total inflation up by 0.3% and the core rate up by 0.2%.


The increase in total CPI was driven by increases on gasoline (+1.7%) and shelter (+0.3%).  The Core rate was bolstered largely by the shelter index.

On a year-over-year basis, total CPI was up 2.8%, versus 2.5% in April. Core CPI was up 2.2%, versus 2.1% in April.

The takeaway from the Consumer Price Index for May is that it validated the 25 basis points rate hike by the FOMC implemented last week (see below) and provides further support for my view that there will be a total of four rate hikes this year.

The Federal Reserve raised interest rates last Wednesday for the seventh time since the start of the financial crisis. In its monetary policy statement  the central bank raised the target range for its benchmark interest rate by 0.25% to a range of 1.75%-2%, the highest seen since September of 2008.


In raising its benchmark interest rate, the Fed cited an economy that is growing at a “solid” rate – an upgrade from its characterization in May of an economy growing at a “moderate” rate.

The most notable change to the Fed’s statement was the elimination of language suggesting that its policy would “for some time” remain accommodative. This “tweak” suggests to me that Fed officials see monetary policy as nearing its neutral rate setting, or the interest rate at which the economy would experience full employment and price stability, which the Fed has defined as 2% inflation.

The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly as those rates correlate more closely with inflation expectations and the long-term economic outlook.  The average 30-year fixed mortgage rate has already climbed from 4.15% to 4.54% since Jan. 1 largely because investors expect federal tax cuts and spending increases to push inflation higher; however, the rate is down from a recent high of 4.66% in late May. The rate hike was already built into mortgage rates.

U.S. Retail Sales rose by 0.8% in May (I had forecast +0.4%) and was revised up to 0.4% (from 0.3%) in April.  Core sales rose 0.9% – well above my forecast for 0.5% – and was revised up to 0.4% (from 0.3%) in April.

Retail Sales

The only two retail categories seeing a decline in sales in May were furniture and home furnishing stores (-2.4%) and sporting goods, hobby, musical instrument and book stores (-1.1%).

The largest sales increases were registered for miscellaneous store retailers (+2.7%) and building material, garden equipment, and supplies dealers (+2.4%), which rebounded after the cold/wet month of April.

On a year-over-year basis, total retail sales were up 5.9% in May and up 6.4% when one excluding auto sales.

The takeaway from this report is that consumer spending on goods was strong in May, which will feed expectations for a healthy pickup in second quarter GDP growth.

The early June Consumer Sentiment reading came in at 99.3, marginally higher than my forecast for an increase to 99.0.


The Current Economic Conditions Index increased to 117.9 from 111.8 and the Index of Consumer Expectations dipped to 87.4 from 89.1.

The takeaway from this report is that the Expectations Index declined to its lowest level since the start of the year due to less favorable prospects for the overall economy, which were tied, in part, to higher inflation expectations.

What to Watch for This Week

The NAHB Housing Market Index rose from 68 to 70 in May and I am looking for the June figure to remain at the same level.

U.S. Housing Starts dropped 3.7% in April as multifamily permits contracted fairly substantially.  Look for the May number to improve with starts rising from an annual rate of 1.287 million to 1.323 million.

U.S. Building Permits also fell in April (-1.8%) for similar reasons.  I expect to see further contraction with the annual rate dropping from 1.352 million to 1.343 million.

U.S. Existing Home Sales dropped by 2.5% in April to an annual rate of 5.46 million and I expect to see the May figure improve to 5.55 million.