It was a data intensive week showing that the U.S. economy remains strong in early 2018, but there is a whiff of inflation in the air. Most of the recent inflation comes from higher energy prices, but non-energy prices are inching up too. That is a very important generalization because if the Federal Reserve is thinking that way, it sets the stage for another fed funds rate hike on March 21, and two to three more for the remainder of this year.
The headline CPI gained 0.5 percent in January, its strongest monthly gain since last September. 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.
The Producer Price Index for Final Demand increased by 0.4 percent in January. The PPI’s energy sub-index was up by 3.4 percent for the month. This will reverse in February, following oil prices down. Other major components of the PPI were also warm in January. The core measure of PPI for Final Demand, all items less food, energy and trade, was up by 0.4 percent. The 12-month change in the PPI for Final Demand was 2.7 percent.
Import prices increased by 1.0 percent in January. The weaker dollar is contributing to higher import prices. The Fed’s broad dollar index has been trending down since early 2017, dropping another 2.3 percent this January. Higher oil prices in January also put upward pressure on import prices. This will reverse in February.
U.S. industrial production eased slightly in January, down 0.1 percent. Manufacturing output was unchanged for the month. Total vehicle assemblies (autos plus light and heavy trucks) increased in January to a strong 11.27 million unit annual rate. Mining output fell by 1.0 percent, at odds with reports of increasing U.S. crude oil production at year-end 2017. Utilities output was up by 0.6 percent for the month.
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. We expect consumer spending to grow at a slower rate in the current first quarter following a strong 2017Q4.
Residential construction activity heated up in January with total housing starts increasing by a strong 9.7 percent, to a 1,326,000 unit annual rate. Single-family starts were up by 3.7 percent, to an 877,000 unit annual rate, still well below the recent peak rate from November. Multifamily starts jumped up to a 449,000 unit annual rate, the strongest they have been since December 2016. Total permits for new construction were up by 7.4 percent for the month, to a 1,396,000 unit annual rate. Strong residential construction data for January aligns with positive builder confidence in January and February.
The University of Michigan’s preliminary Consumer Sentiment Index increased noticeably in February to 99.9. The index has been high, but was easing from November through January.
Initial claims for unemployment insurance increased by 7,000 for the week ending February 10, to hit 230,000. Continuing claims gained 15,000 to hit 1,942,000 for the week ending February 3. Both increases represent inconsequential gains to very low levels.
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