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January 12, 2018 Blog 2 min read

CPI increased 0.1% from prior month; retail sales up 0.4% in December.

Line graph showing CPI YoY History 

The consumer price index (CPI) increased by 0.1% in December from the month prior, in line with expectations. Energy prices dipped 1.2% for the month, helping to hold the broad gauge of consumer inflation down. Excluding both food and energy, core CPI rose by a stronger-than-expected 0.3% in December.

 

Over the past year, headline CPI rose by 2.1%, staying within a relatively narrow band over the past several months. Inflation has held relatively steady since late summer even as overall economic growth roared back to 3.2% in the third quarter. Core inflation, has also moved little since last May, but the unexpectedly large increase in December merits watching. Is it a one-month aberration or the leading edge of a period of increasing inflationary pressure?  At this point, it’s too soon to say.

 

One of the drivers of the economy in recent months was solid consumer spending, and that was apparent again in the December retail sales results. Sales rose by 0.4%, roughly in line with expectations.  November sales were adjusted to a slightly strongly 0.9%. Over the past year, retail sales have strengthened, growing by 5.4% in 2017, easily besting calendar year gains of 4.0% and 3.1% in 2016 and 2015 respectively.

 

What we’re seeing is the positive economic benefit of strong labor market conditions fueling a confident consumer base that is in turn spending.  Household balance sheets in many cases have also been buttressed by strong capital market returns and rising home prices. Acknowledging that every situation is different, on the whole, the financial position of the average American household has improved in recent years.

 

At the same time, strong labor market conditions are making it increasingly difficult for potential employers to identify and attract talent. While not as evident across all the data, wage growth is picking up. The competition for workers will continue to heat up, and rising wages will in due time filter through to higher inflation as well.

 

Although inflation remains below the Fed’s target, policymakers continue to move ahead with their gradual tightening policy. The central bank will continue to raise short-term rates at a measured pace and trim its balance sheet to nudge long-term rates higher as well.

 

The bottom line is that the economy is doing quite well right now – well enough for consumers (on the whole) to spend more and well enough for the Fed to feel compelled to take steps to take the edge off before inflation (which remains constrained for now) truly becomes problematic.

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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.