Author Archives: Gary D. Halbert

Consumer Price Index Rises More Than Expected

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.

US Consumer Price Index

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.

US Retail Sales

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.

Is Stock Market Swoon the Bursting of a Bubble?

With the dramatic plunge in US stocks of 10% (as of Tuesday’s intra-day low), investors are asking whether this is just a normal “correction,” or has the nearly nine-year bull market finally come to an end? No one knows the answer, of course. I argued in my Blog on January 11 and my E-Letter on… Continue Reading

Stock Market Rally Results In More Bond Buying

It is widely expected that the Fed will raise short-term interest rates three times this year. If so, bond yields should go up further in 2018, which should push bond prices lower. In fact, bond yields have already gone up this year, but not as much as most forecasters predicted. The yield on the 10-Year… Continue Reading

How Wealth is Allocated Among Net Worth Levels

In Tuesday’s Forecasts & Trends E-Letter, I focused on how our national savings rate has plunged to only 2.9%, the lowest in a decade. I included a chart showing how the Top 1% of income earners save 38% of their income, whereas the rest of the Top 10% save only 12% of their income. I… Continue Reading

Shutdown Update, Stock Market, Economy & Inflation

At the risk of harping too much on the issue of a government shutdown tomorrow at midnight, here is a brief update on where we stand. On Tuesday night, House Republican leaders decided to go ahead with a funding plan (continuing resolution) to keep the government funded until February 16 – which would mark the… Continue Reading