Three major economic reports were released this morning:
1) Headline consumer inflation jumped sharply higher last month, the Bureau of Labor Statistics reports. On closer inspection, however, it’s all about energy. The so-called core reading of inflation (excluding the volatile energy and food sectors) still looks tame.
2) Retail sales in December continued forging higher, reaching a new all-time high, according to the Census Bureau.
3) Industrial product rose at a healthy clip last month, advancing the most since last July, the Federal Reserve reports.
Overall, today’s trio of numbers add up to some much-needed encouragement that a) economic growth still has the upper hand; and b) inflation doesn’t appear threatening.
But what of last month’s pop in CPI? Is that a sign of things to come? Headline inflation rose 0.5% in December, up dramatically from November’s 0.1 increase. The change, however, is due almost entirely to higher energy prices last month. That’s hardly trivial, but energy prices are volatile and so what goes up may come down. Even if you expect oil and gasoline prices will remain elevated, they’re unlikely to continue surging month after month, and so the case for monitoring core readings of inflation as a guide to the future has some merit.
By that standard, consumer inflation still looks docile. Core CPI was up just 0.1% in December. Over the past year, core CPI is higher by less than 1%–a 50-year low. Even headline inflation’s annual pace is still bumping along at its slowest rate since the early 1960s. Inflation’s probably headed higher in the years ahead, but it’s hard to find an imminent threat in today’s numbers.
If inflation is, in fact, contained, that makes the gains in retail sales and industrial production all the sweeter. Indeed, industrial production continues to expand at an annual rate of 5%-plus. That’s strongest rate of expansion since the mid-1990s. The pace probably isn’t sustainable, but for the moment it’s clear that the industrial sector is humming along.
So too are retail sales. In fact, December’s 0.6% rise—the sixth straight monthly increase—puts seasonally adjusted retail sales at an all-time high, surpassing the previous peak set back in late-2007, on the eve of the Great Recession’s arrival.
The case looks good for expecting continued expansion in the economy, as today’s numbers suggest. If nothing else, the latest reports lend fresh support for the recent forecasts of U.S. GDP growth this year in the 2%-to-4% range.
What could derail this rosy outlook? Jobs, which have yet to deliver a convincing run of growth. As we discussed yesterday, the on-again/off-again nature of the labor market rebound continues to raise questions about the durability and depth of the otherwise encouraging macro trend. There’s a recovery in progress, but it still looks more or less like a jobless recovery. There will be growth this year, but it’s still precarious until (or if) job creation picks up.
Retail sales in particular may be vulnerable without a stronger labor market, which in turn would raise fresh questions about the broader economy. No sign of that today, of course, although focusing exclusively on the rear-view mirror is always hazardous, perhaps more so than ever.