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The Consumer Price Index was hotter while retail sales were cooler than expected in January 2018.

January Consumer Price Index & Retail Sales, February Mortgage Apps

February 14, 2018
By Robert A. Dye, Ph.D., Daniel Sanabria

Gasoline Fuels Consumer Price Inflation, But Will Reverse in February

  • The Consumer Price Index for January gained 0.5 percent with higher gasoline prices.
  • Retail sales for January slipped by 0.3 percent as auto sales fell.
  • Mortgage Applications slipped in early February. 

The Consumer Price Index was hotter than expected in January, and retail sales were cooler than expected. Financial markets caught a whiff of inflation this morning, causing them to discount future stock and bond prices, adding to the recent spate of stock market volatility. After opening losses, stock prices have firmed up. The headline CPI gained 0.5 percent in January, its strongest monthly gain since last September. And like last September, energy prices were a key culprit. The energy price sub-index gained 3.0 percent for the month as gasoline prices increased by 5.7 percent. Over the previous 12 months headline CPI is up 2.1 percent. Core CPI (all items less food and energy) increased by 0.3 percent for the month, and is up by 1.8 percent over the year. Inflation in the core index was broad-based in January, pushed by shelter, apparel, medical care, motor vehicle insurance, personal care and used cars and trucks. A hotter-than expected CPI in January does not necessarily translate into more aggressive interest rate hikes by the Federal Reserve for two reasons. First, we already know that energy prices are lower in February, which will reverse the January push. Also, the Fed watches a more stable measure of inflation than the CPI. The trimmed mean PCE price index uses the same source data as the CPI but it smooths out the volatility substantially. The 12-month trimmed mean PCE price index has been running below the Fed’s 2 percent inflation target since mid-2012. 

Retail sales eased by 0.3 percent in January. Auto sales were a drag, as unit sales fell from a 17.9 million unit rate in December to a 17.2 million unit rate in January. The dollar value of auto sales fell by 1.3 percent in January. Ex-auto retail sales were unchanged for the month. Positives from gasoline stations and clothing stores were offset by weakness in building materials and health care stores. We expect overall consumer spending to grow at a measurably slower rate in the current first quarter following a strong 2017Q4. 

The Mortgage Bankers Association’s composite mortgage application index fell by 4.1 percent for the week ending February 9, as mortgage rates increased. According to the MBA, the rate for a 30-year fixed rate mortgage increased to 4.57 percent last week, noticeably above the 4.23 percent from early January. Along with a whiff of inflation, we are seeing mortgage rates inch up, which are a headwind for home sales. The purchase index dropped by 5.9 percent in early February, as the refi index fell by 1.9 percent. 

Market Reaction: U.S. equity markets opened with losses but have recovered. The 10-Year Treasury bond yield is up to 2.88 percent. NYMEX crude oil is up to $59.26/barrel. Natural gas futures are up to $2.64/mmbtu.

For a PDF version of this report click here: CPI_021418.

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