Total retail sales fell 0.5% in May with widespread declines among the major categories. May was cooler-than-normal, which, probably according to the economic bulls, held down convertible sales. And without a sporty new convertible to take you there, folks did not dine out as much either. But if they were cooped up in their McMansions, I wonder why they did not buy more big screen TVs? Or maybe they are just tapped out now that it cost more to extract equity from their homes (aka, personal ATM machines) what with short-term interest rates having moved up and debt-service burdens already high. Whatever the case, the chart below shows that retail sales on a year-over-year basis are losing momentum.

Has All-Items Inflation Peaked?

Kind of looks that way from May PPI data. The PPI for all finished goods dropped 0.6% in May, with the core edging up only 0.1%. As the first chart below shows, on a year-over-year basis, both the all-items finished goods PPI and the core finished goods PPI look as though they might be past their peak. And the second chart below clearly shows that pipeline wholesale price pressures are past their peak.

The headline CPI for May also will likely post a decline. In the event, it would mean that the year-over-year change in the CPI would drop below 3% vs. April's 3.5% increase. Perhaps the Fed should actually listen to its rhetoric. Inflation does appear to be contained. Long-run inflation expectations are coming down based on market-based indicators. Retail sales are moderating. Leading indicators in May are likely to post their fifth consecutive monthly decline and their tenth decline in the past twelve months. Yet Fed policy remains accommodative?

Fed Says There Is No Housing Bubble, But ...

Fed Governor Bies reassured everyone that there is no national bubble in housing, but lenders might be enabling some elements of speculation through easier underwriting standards and offering a full menu of exotic mortgage products to make monthly payments low enough so that almost anyone could initially handle the monthly nut on a McMansion. Governor Bies said that the Fed was considering issuing some supervisory guidelines on commercial property lending, too, after having issued some on home equity lending on May 16 (see http://www.northerntrust.com/library/econ_research/weekly/us/pc052605.pdf). So, it appears as though, despite the "Orwellian fact" that there is no national housing bubble, the bank regulators are going to be asking some tough questions about real estate lending the next time they pay a visit to their constituents.

By the way, I have been fond of saying that although there might not be a housing bubble in Manhattan, Kansas, there is one in Manhattan, New York. I guess I can't use that line anymore inasmuch as a resident of Manhattan, Kansas informed me that residential real estate prices had skyrocketed there, too. Maybe someone out in cyberspace could fill me in on house prices in Manhattan, Montana.