Getting a clear picture these days of inflation is a bit like downloading a jpeg over a poor AOL connection circa 2000. It used to take a few seconds to come into focus, first displaying the full image as a pixelated blur and then, over several passes, progressively sharpening the details. That’s what is happening now with BLS data. Last week, the BLS reported that the official CPI-U rose 0.3 percent in April after accounting for seasonality—slightly lower than the 0.4 percent April print for Dotdat’s real-time CPI, and a bit higher than the Bloomberg consensus forecast of 0.15 percent.

At the category level, many of our real-time measures anticipated the official data well e.g. used vehicles, apparel, electronics, housing, and recreation while others diverged (notably airfares and food away from home, which we’ll review in posts over the next few days).

Unlike for the headline number, though, the dynamics of our real-time core CPI diverged from the official data in continuing the deceleration from March into April. We’ll need a few more months of official releases to gauge if the real-time measure is leading a coming deceleration in the official core index or if it has started to diverge from the official data, and if so, why.

Since the BLS release, several major retailers—notably Walmart and Target— announced disappointing Q1 earnings after lowering their prices over the February-April period to move stagnant general merchandise (GM) inventory. Both reported that in mid-Q1 consumers stopped buying electronics, furniture, and apparel as they paid more for food and gas. From Walmart’s earnings call:

“the rate of inflation in food pulled more dollars away from GM than we expected as customers needed to pay for the inflation in food”

After the announcements, both retailers’ shares saw their largest one-day declines in 35 years. The story seems to be that, while expecting a downshift in consumer spending, they underestimated its magnitude, leading to excess inventory in—from Target’s earnings call transcript—kitchen appliances, TVs, and outdoor furniture as well as home electronics, sporting goods, and apparel.

Leading edge of lower demand?

Is this the leading edge of lower demand, a first signal of a recession? Our real-time data suggest the answer is no—as prices have rebounded in both the softlines (apparel) and hardlines (appliances, furniture, etc) since early May, albeit at a modest pace.

Real-time inflation in general merchandise came down about a month earlier than the BLS’s CPI-U with greater weakness in March and April, illustrated by our real-time Apparel inflation figure below, and has since shown some signs of normalization. Real-time Apparel inflation declined 1.5 percent in March (vs. a 0.6 percent increase in the CPI-U) and 1.0 percent in April (vs. a 0.8 percent decline in the CPI-U)—more in line with major retailers’ description of their pricing over the quarter than the official statistics.

Late Q1 and early Q2 weakness looks more like a pause than a persistent shift down in demand, as “customers are making more real-time choices”1 with higher inflation.

But caution is warranted—This is only the second act. Discounts to clear out inventory continue and may deepen if consumers pull back again. That said, Walmart sees similar trends as our real-time prices in Q2, with stronger general merchandise sales: “We see growth in high-ticket items like game consoles, recently with warmer weather, strength in patio furniture, grills, gardening and hardlines, but we do see some consumers switching. We see categories like deli, lunch meat, bacon, dairy, where we see customers trading from [national] brands to private brands, so we see both of those things happening at the same time.”2 They, like the rest of us, are gradually sharpening the details on the nature of consumer demand in this erratic macro environment.

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