Consumer prices were up more than forecast in January according to the Labor Department, prompting more concerns about rising inflation later this year. The Consumer Price Index (CPI) rose 0.5% in January versus the pre-report consensus of 0.3%. Core CPI, excluding food and energy prices, was up 0.3%, the most in a year, versus the consensus of 0.2%.
Despite the higher than expected rise in January, the increase in CPI over the last 12 months remained unchanged at 2.1%. The 12-month rate of core inflation was also flat at 1.8%.
The report indicated that price pressures were “broad-based,” with rises in gasoline, shelter, clothing, medical care, food and auto insurance. It was the largest monthly increase since September of last year.
Wednesday’s report showed an index of energy prices rose 3.0% in January from the prior month, led by a seasonally-adjusted 5.7% rise in gasoline costs. The price index for transportation services rose 0.8%. Apparel prices reversed three prior months of declines, rising 1.7% in January.
Markets initially reacted sharply to the news. The Dow opened more than 100 points lower on Wednesday but quickly reversed those losses and closed up over 250 points for the day. Government bond yields also turned higher, with the benchmark 10-year Treasury note trading above 2.9%, the highest level of the year. Gold traded to the highest level since May 2017 on the news.
The stronger than expected CPI report yesterday raised the odds that the Federal Reserve will hike the Fed Funds rate at least three times this year. Central bank officials have been monitoring the inflation picture closely, looking for signs that a tightening labor market and continued economic growth are generating stronger wage and price increases after years of weak inflation.
The next Fed Open Market Committee meeting is on March 20-21, at which time the Fed is expected to raise the Fed Funds rate range from 1.25%-1.50% currently to 1.5%-1.75%. Most Fed-watchers expect another quarter-point rate hike in June and a third in September.
Some forecasters continue to expect the US economy to grow by around 4% GDP this year. If correct, that could prompt the Fed to raise rates a fourth time at its final policy meeting of the year on December 18-19. That remains to be seen, of course.
Retail Sales Post Largest Decline in 11 Months
US retail sales unexpectedly fell in January, recording their biggest drop in nearly a year, as households cut back on purchases of motor vehicles and building materials.
The Commerce Department reported on Wednesday that retail sales decreased 0.3% last month, the largest decline since February 2017. Data for December was revised to show sales unchanged instead of rising 0.4% as previously reported. Retail sales rose 3.6% over the 12 months ended in January.
The pre-report consensus had retail sales climbing 0.2% in January, so the latest report came as a disappointing surprise. Excluding cars, trucks and auto parts, retail sales were flat last month, whereas economists had expected a 0.5% increase in this reading. Excluding both gasoline and autos, spending fell 0.2% from December. Auto sales alone fell 1.3% in January.
Sales also declined in January at grocery stores, hardware stores, furniture stores and health and personal care stores. On the bright side, sales rose last month at department stores, clothing stores and electronics sellers.
Some of the weakness in January retail sales could be linked to the harsh weather last month and the unusually high number of reported flu cases this year. Yet, on balance, it was probably inevitable that sales would start to slow after their recent strength, as you can see in the chart above.
On the plus side, jobs growth remains strong, consumer confidence is at an unusually high level and the recent tax cuts are providing a one-off boost to disposable incomes this month. As a result, the near-term prospects for consumer spending remain fairly bright.
Consumer spending is the main engine of the US economy, accounting for almost 70% of Gross Domestic Product. Household spending has been boosted in recent months by the lowest unemployment rate in 17 years, continued job gains and signs of a pickup in wage growth.
It remains to be seen if the slowdown in consumer spending last month will continue just ahead. As I reported earlier this month, the US savings rate fell to the lowest level in 12 years at the end of last year. That doesn’t bode well for consumer spending long-term. I’ll have more to say on this topic in the weeks ahead.