US retail sales were firmer than expected in October, data released on Wednesday showed, but a cool read on producer prices helped take the hawkish edge off.
Nominal spending across the world’s largest economy dropped just 0.1% last month against expectations for a decline triple that size. The range of estimates, from more than five-dozen economists who ventured a guess, was -0.7% to +0.3%.
The small drop counted as the first decline in seven months. September’s already robust showing was revised up to show a 0.9% increase, the second-largest of 2023.
Six of 13 categories showed an increase for October versus 10 in September and eight in October of 2022. Sales rose 0.3% at food services and drinking places, the only services sector category in the report. Nonstore sales rose 0.2%.
Excluding autos, sales rose 0.1%. Consensus was looking for a decline. Control group sales rose 0.2%, matching forecasts. That’s the relevant print for GDP estimates.
The spending data wasn’t likely to move any needles, overshadowed as it was on Wednesday by the prior session’s favorable CPI report. Indeed, a much cooler-than-anticipated read on producer prices served to underscore the message from CPI.
The headline PPI gauge fell 0.5% last month, below every estimate from more than 50 economists. The range was -0.3% to 0.4%.
On a YoY basis, producer prices rose just 1.3% in October. The month-to-month decline was the most pronounced since April of 2020, when the world was worried about a deflationary spiral.
The PPI goods gauge fell 1.4% from September to October thanks to an outsized drop on the energy index. The gauge for final demand services was unchanged, the “best” (in the context of desirable disinflation) read since a slight decline in February.
You don’t need a lot of overwrought analysis here: The soft PPI reading had the potential to amplify the message from the CPI report. There’s disinflation in the pipeline, or at least that’s how overzealous markets will probably see things.
Taken together, the retail sales report and the PPI figures were highly amenable to a Goldilocks interpretation, although after Tuesday’s fireworks, it may already be in the price.
Maybe pandemic inflation was transitory-ish after all. By staying where it is for a while, the Fed has a chance, imo, to nudge prices back toward pre-pandemic levels (i.e., deflation) without harming the economy. Wall Street, of course, disagrees and can be expected to ratchet up its cries for (much) lower interest rates.
Broad deflation will hit corporate revenues and earnings enough to drive UE higher, and perhaps tax revenues enough to worsen the deficit, I fear. I think the Fed is much more comfortable with disinflation (low inflation) than deflation.