The US economic profile hit some turbulence in yesterday’s updates on retail sales and consumer inflation in January. The surprisingly soft spending data suggest that the macro trend has moderated in the kickoff to 2018 while pricing pressure can no longer be counted on to remain unusually low. Reviewing the latest reports in terms of annual changes raises fresh concerns for the months ahead, but it’s still premature read the updates as clear warning signs for the economy.
Let’s start with retail sales, which slumped 0.3% in January vs. the previous month – well below the consensus forecast for a 0.3% rise. The monthly comparison tends to be noise, but the year-over-year change also reflects weakness. Headline spending decelerated to a 3.6% advance, the slowest since last August (blue line in chart below). A similar narrative applies to sales excluding autos (red line).
The crowd was surprised by the slowdown, but the weaker print at this stage should be read as a sign that the case for projecting an acceleration in economic growth in 2018 is weaker than previously assumed. No one is popping champagne corks over a 3.6% annual rise in retail spending, but the current trend is only moderately below the average 4.4% one-year gain that’s posted over the past 12 months. As such, yesterday’s results appear to indicate that consumer spending will once again moderate after running higher in recent months, although it’s far too early to assume anything darker.
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Alarm bells will ring louder if the annual pace for retail sales weakens again in next month’s update. But for now it’s reasonable to conclude that the downshift in spending is par for the course in terms of the typical ebb and flow within the range we’ve seen over the last year or so.
As for inflation, the January change worked pundits into a frenzy as breathless reporting highlighted a stronger-than-predicted 0.5% increase in the headline consumer price index (CPI) vs. the crowd’s 0.3% forecast. Yet that only translates into a fractionally higher 2.1% year-over-year trend, up from 2.0% previously. In other words, the latest print is middling relative to the range in recent history on an annual basis.
The core CPI data (excluding food and energy) is generally more reliable for monitoring the data and on this front the numbers still reflect a mostly stable trend that’s just below the Fed’s 2.0% inflation target. Core CPI’s year-over-year gain ticked up to 1.8%, slightly above the 1.7% in December (red line in chart below). Keep in mind, however, that core CPI was running hotter a year ago, at a 2.3% annual pace and so the latest update is hardly a sign that inflation is set to accelerate in a meaningful degree in the immediate future.
Nonetheless, there’s a renewed appetite for assuming that pricing pressure is firming up, if only slightly. Yesterday’s updates tell two stories, notes Paul Ashworth, chief U.S. economist for Capital Economics. “The real economy may not be as strong as we thought, but also that inflation may be a bit higher.”
J.P. Morgan’s chief economist advises that “while it is still early going, we are taking down our outlook for first-quarter gross domestic product from 3.0 percent to 2.5 percent,
Michael Feroli wrote in a note to clients. He adds that the “inflation reading should probably cement in place the Fed’s intent to hike rates at the March FOMC meeting.”
The next major reality check for consumer spending and inflation arrives on March 1, with the January update on personal spending for January. The key question is whether the data will corroborate the numbers in yesterday’s releases?