- XE Contributor
What a difference stalling gas prices make!
In March 2016, gas prices rose almost 12% m/m. This year, they rose only 1%:
Since gas prices are the biggest component of the m/m variance in the CPI, the lack of any increase in March gas prices led to an outright decline in March CPI, -0.3%, which in turn cause YoY CPI to decelerate to +2.4%:
The surprising March deflation made an important difference in retail sales, which nominally declined -0.2%. But adjusted for inflation, real retail sales actually rose slightly (although they are still below their December high):
It also meant that real average hourly wages rose sharply for the month, up +0.5%, which recovered almost (but not quite) all the ground real wages have lost since last July:
Real wages are still slightly negative YoY however:
Another significant difference is in the behavior of real money supply. Real M2 has been decelerating since last August, and was poised to turn neutral if not negative. Here's the market I laid down about a month ago:
"Both real M1 and real M2 were firmly positive almost all last year, although generally less so in the last several months, with real M2 showing substantial deceleration. I will change M2 to a neutral if either the YoY measure decelerates below +3.0%, or if on a quarter over quarter basis it improves by +0.6% or less."
Nominally M2 was up +1.5% q/q and up YoY +6.5% in the first quarter. As of February YoY inflation was up +2.7%, so we were getting close to the marker. With outright deflation in March, however, Real M2 YoY is up +4.0%:
and M2 q/q is up just over +0.6%:
Bottom line: the stall in gas prices, which translated into deflation in consumer prices in March, is responsible for both real retail sales and real M2 remaining positives for the short and longer term outlook for the economy. If gas prices continue to sleep, real wages should also make a new high shortly, which will be a further boost.