Consumer Price Index, retail data not pretty

But they may be overstating economic pain

Shoppers walk through The Grove in Los Angeles on Dec. 22, 2017. CREDIT: Bloomberg photo by Dania Maxwell.
Shoppers walk through The Grove in Los Angeles on Dec. 22, 2017. CREDIT: Bloomberg photo by Dania Maxwell.

Faster-than-projected U.S. inflation and an unexpected decline in retail sales at the start of the year may cause some indigestion on Wall Street. But it probably don’t mean much pain for the economy.

The core consumer price index, which excludes volatile food and energy costs, rose 0.3 percent in January from the previous month, the biggest advance in a year and exceeding the 0.2 percent median estimate of economists, a Labor Department report showed Wednesday.

Separate figures showed purchases at retailers dropped 0.3 percent after a downward revision to December.

Treasuries slumped and investors marked up expectations for Federal Reserve interest-rate increases.

The inflation report was hotly anticipated following robust wage data earlier this month that sent yields higher and started a rout in equities that pushed the main indexes into the first correction in two years.

While the retail figures support analyst forecasts that consumption will slow this quarter on the heels of the biggest quarterly advance in more than a year, consumer spending likely will be buttressed this year by wage growth, a tight labor market and tax cuts.

“These reports tell two stories: ... that the real economy may not be as strong as we thought, but also that inflation may be a bit higher,” said Paul Ashworth, chief U.S. economist for Capital Economics. “The Fed looks like they’re leaning towards the inflation part of the story.”

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Fed funds futures show that the market is now pricing in two full quarter-point increases through the central bank’s September meeting, and that the overall amount of tightening being anticipated for this year and next has rebounded close to levels seen earlier in February.

In December, Fed officials penciled in three interest-rate increases for 2018 in their most recent set of quarterly economic projections.

That already incorporated expectations for a bump in inflation this year — to 1.9 percent, as measured by the personal consumption expenditures index, which typically runs slightly slower than CPI. Excluding food and energy, PCE inflation was 1.5 percent in December.

Michael Feroli, chief U.S. economist at JPMorgan Chase, said the new data cement the likelihood of a policy move when the Federal Open Market Committee gathers next month and increase the chances that officials will forecast four interest-rate hikes this year, up from three.

“To the extent markets had been dismissing the idea that inflation could firm, that was a mistake. Now markets are re-pricing to reflect that inflation risk,” said Feroli, who formerly worked at the central bank. While Wednesday’s data don’t necessarily mean a significant acceleration is coming, “I definitely expect the numbers to continue to push up,” he said.

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