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February 14, 2018 Blog 2 min read
Consumer Price Index rises 0.5% in January; retail sales decline by 0.3%
Line graph showing CPI YoY.

In recent weeks, data on average hourly earnings spooked the markets was a key catalyst in pushing interest rates higher and the resulting sharp increase in stock market volatility. At first glance, today’s CPI report won’t do anything to calm investors concerned that inflation is on the upswing.


The consumer price index (CPI) rose 0.5% in January, easily besting expectations for a 0.3% increase. Energy prices rose sharply after a flat December, increasing by 3.0%, pushing the year-on-year increase up to 5.5%. Food prices, the other more volatile piece of the puzzle, rose by a pedestrian 0.2%. 


Despite the sharp monthly increase, the CPI for the preceding 12 months was unchanged at 2.1%. The core reading also held steady at 1.8%.  That’s the good news, as a similar surge in the CPI occurred last January.


If recent data on jobs and inflation point towards economic strength, the January report on retail sales suggests that everything isn’t coming up roses for retailers. January sales declined by 0.3%, while revisions to December sales figures resulted in no gain for the month. Top-line sales growth dipped to 3.6% year-over-year for the 12 months ended January 31.


A marked decline in auto sales played a significant role in reining in headline sales growth, but even setting that aside, sales were flat.


The story varies greatly though across retail sectors. Nonstore retailers, which most notably encompasses online shopping, was flat for the month, but still up more than 10% for the year.  There’s no question that changes in the way that consumers shop is still playing out.  That may be most apparent in sharply declining sales for purveyors of music and books, and other sports and hobby retailers, where sales dropped by over 7% in the past year.


The January release of the jobs report was arguably upbeat as payrolls added 200,000 jobs and the unemployment rate held steady at 4.1% for the fourth month in a row. Perhaps most importantly, wage growth ticked higher. Despite the lack of gains in recent months, a sustained, stronger pace of wage growth should support growth in consumer spending. Coupled with the increase in take-home pay for many households as a result of the recently enacted tax cuts, the outlook for household budgets and discretionary spending is improving.  How those dollars will be spent – and the degree to which retailers will benefit – remains to be seen.


Big picture, the economy looks to be on the right path – even to the point that there are rumblings about the risk of overheating as fiscal stimulus takes hold. The Fed is positioned to raise short-term rates, even as the market’s reaction to rising inflation worries takes long-term rates higher as well. In the near-term, neither is likely to kill the expansion, but the prolonged effect of higher rates should blunt the impact of pro-growth fiscal stimulus.

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