Data: Inflation Cools; Retail Sales Slip

A batch of U.S. economic reports released on Sept. 12 carried some mixed messages for the U.S. economy: Measures of wholesale inflation dipped in August, and a closely followed reading of consumer sentiment surged in September. But another report painted a different picture of the consumer: Retail sales dropped by a worse-than-expected amount in August. A separate release showed a surge in business inventories in July.

The U.S. producer price index (PPI) fell 0.9% in August, lower than the 0.4% decline the markets expected, while the core rate edged up 0.2%, which was in line with Wall Street estimates. This comes after gains of 1.2% and 0.7%, respectively, in July. Year-over-year, overall PPI decelerated to 9.6%, from 9.8% in July. Core prices, excluding food and energy, accelerated to 3.6% over last year from 3.5% previously.

Energy plunged 4.6%, to explain the weakness in the headline index. Gasoline prices dropped 3.5%, while food prices were up 0.3%. Light truck prices dropped 1.9%, while computers fell 1.2%.

Lehman Brothers (LEH) economist Michelle Meyer said in a Sept. 12 note that while the year-over-year core rate came in at a "still elevated" 3.6%, "we remain comfortable with our view that inflation is likely to trend lower as commodity prices continue to cool and slack develops in the economy."
Mixed Components

U.S. retail sales fell 0.3% in August; excluding autos, sales were down 0.7%. Markets expected a 0.3% increase for the overall index and a flat reading for the ex-autos index. Sales are down 0.4% over last year (decelerating from +4.5% previously), with ex-autos sales up 4.2%, below the +7.9% rate previously. Moreover, July's headline 0.1% dip was revised lower to -0.5%. July ex-autos was revised to 0.3% from +0.4% before. June data were also revised down.

The components of the report were mixed. Excluding autos, gas, and building materials, sales fell 0.2%. Gas station sales fell 2.5%, nonstore retailers were down 2.3%, while building materials fell 2.2%. Vehicle sales were up 1.9%; food sales rose 0.7%.

"Retail sales through August were much weaker than we expected, though it was difficult to gauge the likely timing of the rebate boost to spending and the ensuing unwind," wrote Action Economics analysts in a Sept. 12 Web site posting.
Inventories Up

U.S. business inventories rose 1.1% in July, while sales rose 0.5%. The June inventories figure was revised higher, to 0.8%, from 0.7% before. The 1.7% June surge in sales was not revised. The inventory-sale ratio edged up to 1.24, from 1.23 in June.

The University of Michigan's U.S. consumer sentiment preliminary reading surged to 73.1 in September from 63.0 in August. The improvement is much better than the 64.0 expected, and stems largely from the drop in energy prices. The economic outlook index jumped to 70.9, from 57.9 in August, while current conditions rose to 76.5, from 71.0.

The one-year-ahead inflation measure fell sharply to 3.6%, from 4.8% in August and an all-time high of 5.2% as recently as May. "This drop brings this measure now well below the prior long-held 4.8% record-high from October 1990, as the 'panic up-trend' in price that consumers perceived through the first half of the year is now unwinding," wrote Action Economics analysts.

"The reversal in inflation expectations will provide a sense of relief to the Federal Reserve," wrote Meyer of Lehman Brothers.