Last week, we got inflation and consumer sentiment data; they show conflicting views on the economy. Is there a breaking point coming?

Core consumer prices (which strips out fuel and food) came in at 2.4% year over year growth. This typically represents an increasing consumer demand which leads to rising prices.

In the same week, we received survey data that consumer sentiment has slipped to a level similar to this time a year ago. Weakening consumer sentiment, for whatever reason, is typically a negative indicator of future inflation. Typically, strong consumer demand leads to corporations maxing out their utilization rate and increasing prices rather than production. With weaker demand, comes less reason basis for a corporation to raise costs.

The Federal Reserve Board (FRB) has been raising interest rates as indicated over the last year, which would mean we have two more hikes before the year is over. They do this in an effort to combat inflation caused by consumer demand. While the former appears to be there, the latter appears to be getting ready for a hiatus.

Rate hikes in the face of weaker demand could lead us towards an economy that would stall. In recent history, the FRB has been pliable to economic data and that will likely hold form. Should we see weaker demand, expect the FRB to shift and reduce their rate hike outlook.

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