Are rising U.S. consumer prices cause for concern?
On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Senior Client Investment Analyst Chris Kyle discussed the latest U.S. inflation data as well as first-quarter GDP (gross domestic product) growth in China. They also chatted about recent macroeconomic data, early results from first-quarter earnings season and potential economic impacts of the Johnson & Johnson vaccine pause.
Spike in gasoline costs, inflation base effects trigger U.S. price surge
On 13 April, the U.S. Bureau of Labour Statistics reported that its consumer price index (CPI) rose by 2.6% in March on a year-over-year basis - an increase that was higher than consensus expectations, Eitelman noted. At first glance, this number might create come concerns, he said, given that it's above the U.S. Federal Reserve (the Fed)'s inflation target of 2%. However, a more in-depth examination reveals the increase to be far less alarming, Eitelman remarked, citing two key reasons in particular.
"The first reason is that a large component of March's surge in prices came from gasoline, which in general is a particularly volatile component of the CPI," he stated. U.S. crude oil prices have since stabilised more, Eitelman noted, adding that he expects their impact on the CPI to fade moving forward.
The second reason why March's rise in consumer prices shouldn't be viewed as overly concerning, according to Eitelman, is due to what's known as the base effect. The base effect is a term used by economists to describe distortions in inflation data that occur when current inflation numbers are compared to extremely low (or high) numbers from the previous year. In the case of the March 2021 report, the numbers were compared to the numbers from March 2020, when inflation was extremely weak due to the onset of the pandemic, Eitelman explained. "The U.S. actually experienced three months of deflation, from March through May of last year, which led to extremely low CPI levels - and now, the latest inflation data is being stacked against this. This is creating artificially high inflation numbers for March - and we'll likely see similarly skewed inflation readings for April and May as well, before these base effects start fading away," he said.
Overall, with the U.S. labour market still remaining relatively weak and capacity utilisation remaining relatively soft, Eitelman believes there's plenty of room left for the economy to grow before inflation becomes problematic on a sustained basis. "I don't anticipate this occurring until at least 2022, or possibly 2023," he added.
Unpacking China's record-breaking Q1 growth numbers
Turning to China, Eitelman said that the country reported an 18.3% rise in first-quarter GDP on a year-over-year basis - its largest quarterly growth rate on record. Similar to U.S. inflation, some of this increase is skewed by the negative growth rate logged by China during the first quarter of 2020, when its economy contracted by 6.8% as COVID-19 took hold, he noted.
However, the report also points to some significant areas of strength in the Chinese economy, Eitelman said, particularly in manufacturing and industrial activity. "These segments of China's economy looked exceptionally strong during the first quarter, with growth rates around 25%," he remarked, adding that the strength has been driven by a robust pick-up in global export demand. The Chinese economy should continue benefiting from this as the global economy gathers further steam over the coming months, Eitelman noted.
Exceeding expectations: U.S. retail sales, initial earnings surpass forecasts
The week of 12 April saw a slew of new data releases, including macroeconomic data and earnings reports, both of which generally exceeded expectations by a large margin, Eitelman said. "In the U.S., the March retail sales report was pretty exceptional, with sales increasing 9.8% from February," he stated, noting that consensus expectations had been for a gain of roughly 6%. The robust report suggests that the U.S. consumer is in good shape, he said, due in part to the stimulus checks provided for by the American Rescue Plan.
U.S. initial jobless claims for the week ending 10 April also fell dramatically, Eitelman noted, hitting a pandemic low of 576,000. "Fresh off the heels of the nearly 1 million jobs the economy added in March, this report offers further evidence that the nation's labour market is continuing to heal," he stated.
Initial results from the start to first-quarter earnings season were also promising, Eitelman said, noting that roughly 90% of reporting S&P 500® companies have beaten expectations. "While only a small fraction of companies have reported results so far, growth expectations for the first quarter have already been adjusted upward pretty sharply - from 25% to 30%," he said. The preliminary results, which Eitelman characterised as outstanding, suggest that the fundamental strength in the U.S. economy is flowing through nicely into corporations' bottom lines, he remarked.
Potential impacts of J&J pause on U.S. and emerging markets
On 13 April, U.S. health regulators called for a pause in the administration of Johnson & Johnson's (J&J) COVID-19 vaccine, due to rare blood clot issues. Eitelman said that because the company's vaccine only makes up approximately 12% of the U.S. vaccine supply, the suspension will likely only have minimal impacts nationwide.
"The J&J pause is likely to last for another week or so, but will probably only push back when the U.S. economy can fully reopen by one or two weeks, as the majority of COVID-19 vaccines administered in the country are the Pfizer and Moderna versions," he stated. However, the pause could have larger ramifications for emerging-market economies, such as South Africa, that are more reliant on the J&J version, Eitelman said, potentially slowing down the broader emerging-markets recovery.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.