Economic Conundrum: Weak Inflation vs. Slow Retail Sales

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What are economists and investors supposed to think of a trend in which inflation remains low, yet consumers just do not really want to buy more and more goods that drive the economy? Two reports issued on Tuesday morning show the dilemma, though this conundrum may be abating.

Retail sales rose by 0.9% in the month of March. This was 0.1% lower than the Bloomberg consensus. Yet February’s retail sales report was revised higher by 0.1% as well, bringing the contraction to -0.5%. What economists might be excited about here is that March’s gain breaks a three-month losing streak of negative sales. On an annual basis, versus the same time a year earlier, retail sales were up 1.3%. Still, this remains weak, and it has been noted by many economists that consumer spending now drives close to 70% of gross domestic product (GDP).

What about inflation? It turns out that plummeting oil prices may have mostly been realized in the prices already. The Producer Price Index (PPI) was up by 0.2% in March, matching expectations. The core-PPI, excluding food and energy, was also up by 0.2%, or 0.1% higher than Bloomberg was calling for. Still, on a year-on-year basis the PPI was down by 0.8% while the core-PPI was up 0.9%. That is not even half of the Federal Reserve’s inflation baseline target of 2.0% to 2.5%.

ALSO READ: 10 Cars Americans Don’t Want to Buy

So, here is the good news. Consumers appear to have returned after months of not going out to buy things. The first Fed rate hike is now not expected to occur until October of 2015, two months later than recently expected.

The bad news is that some of the economic drags continue and overall economic activity remains subdued. Also, the U.S. dollar is expected to continue to strengthen, and that may only drive down prices of imported goods further.

The U.S. economy and the stock and bond markets are finding themselves in a conundrum. Almost everyone wants rates to go up a bit, but not too much, and economic numbers are not meriting a liftoff from the zero interest rate environment.

Now that the cold weather effectively has ended, we will just have to see what the summer months bring at home and abroad.