Retail sales up 0.4 percent in January; CPI surge of 0.6 percent the largest monthly gain in four years
Retail sales increased by 0.4 percent in January, easily surpassing expectations for a modest 0.1 percent increase. Excluding auto sales, which were quite soft in January, retail sales grew at a strong 0.8 percent clip. December retail sales were also revised sharply higher to a 1.0 percent month-over-month rise.
The positive news for retailers comes after some disappointing indicators in recent months, which suggested that strengthening wages and a largely optimistic consumer sector wasn’t translating to stronger retail results. Now, on the back of solid back-to-back months, the 5.6 percent year-on-year growth rate is the strongest in nearly five years.
Sales results were solid across a wide range of businesses. Perhaps most interesting was that nonstore retailers – which has become a proxy for internet commerce – saw no change in sales in January, despite setting the pace for growth at 12 percent in the past year. In addition, department stores, which have been struggling for some time, saw a solid increase.
The other surprise of the morning came in the form of an unexpected surge in the consumer price index, which jumped by 0.6 percent in January – the largest monthly increase in nearly four years.
The inflationary surge reflected a four percent monthly increase in energy costs. After an extended period in which falling energy costs helped to keep a lid on top-line inflation, the opposite is now the case. With energy costs now up nearly 11 percent in the past year, the headline gauge of consumer inflation is also on the rise.
Core inflation has edged higher in recent months as well, and matched its recent high point at 2.3 percent over the past 12 months.
Putting the data together provides a mixed picture for consumers. If sustained, the recent uptick in household spending would suggest that rosy sentiment and rising income is emboldening consumers to spend. That outlook has to be tempered a bit though to the extent that increasing spending is in part a byproduct of rising prices.
In addition, rising inflation pressures will be an impediment to stronger growth in the real economy. With both the core and headline inflation gauges now north of two percent, it also increases the probability that the Fed will move to raise rates again soon. While current policy is still quite accommodative, the continued tightening in labor market conditions and indisputable evidence that inflationary pressures are building should diminish the degree of skepticism about the Fed’s intentions. In short: expect the Fed to hike again soon.