Elevated Inflation, Sluggish Sales Hangover

Returning from a long holiday weekend, investors continue to digest last week’s slew of disappointing data showing an ongoing accent in cost pressures and a meaningful slowdown in consumer activity.

?

Recall on Wednesday, the CPI rose 0.5% in January, surpassing the 0.3% gain expected and an uptick from a 0.4% increase in December. Year-over-year, consumer prices rose 3.0%, a tenth of a percentage point more than expected and the fourth consecutive month of an acceleration. At 3.0%, this marks the largest annual increase in seven months. Excluding food and energy costs, the core CPI rose 0.4% in January, a tenth of a percentage point more than expected and the largest gain in ten months. Year-over-year, the core CPI increased 3.3%, two-tenths of a percentage point more than expected and an uptick from the 3.2% annual gain in December.??

?

Also, on Thursday, the PPI rose 0.4% in January, a tenth of a percentage point more than expected but down from a 0.5% increase the month prior (revised higher from a 0.2% gain originally reported). Year-over-year, producer prices rose 3.5% in January for the second consecutive month, surpassing the 3.3% gain expected. Excluding food and energy costs, the core PPI climbed 0.3% in January, as expected and down from an upwardly revised 0.4% gain in December. Year-over-year, the core PPI increased 3.6% in January, surpassing the 3.3% gain expected, albeit down from the 3.7% increase in December.

?

Bottom Line: A hotter-than-expected producer price report?on the heels of a rise in the CPI report reinforces concerns of ingrained inflationary pressures in the economy and further upside price risks given an aggressive fiscal policy agenda. As such, hopes of further policy relief from the Fed is off the table, at least for now, or until inflation stabilizes and/or the labor market shows meaningful signs of cooling.

?

Additionally, on Friday, retail sales fell 0.9% in January, more than the 0.2% decline expected and following an upwardly revised 0.7% increase in December (revised up from a 0.4% gain originally reported). The 0.9% drop, however, marks the largest monthly decrease since March 2023. Year-over-year, retail sales increased 4.2% in January, a two-month low.

?

Bottom Line: A disappointing drop in retail sales at the start of year, posting the largest headline decline since March 2023. Of course, some of the weakness can be explained away by unseasonably cold weather and other traumatic events, such as the fires in California, and earlier upside revisions to prior month’s data help mitigate the notion of potentially sustained downside weakness. Still, at least some of the decline reflects a fundamental shift in consumer sentiment dropping at the start of the year under the weight of higher prices and uncertainty surrounding the impact of new fiscal ploy initiatives. While still spending, consumers have clearly curtailed expenditures to a lower level.

?

Of course, not everyone is convinced the latest reversal in prices and mounting pressure on consumers will be a sustained pattern, nor will it be definitively enough to halt any further policy adjustments. according to?Fed Governor?Christopher Waller, for example, while the recent data suggests a continued position on the sidelines, should inflation behave as it did in 2024, rate cuts could resume in the second half. speaking at the University of New South Wales Macroeconomic Workshop in Sydney, Waller said “The data are not supporting a reduction in the policy rate at this time. But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.”?

?

Meanwhile the market is less convinced, with investors still anticipating just one or two rate cuts by year-end.

?

On the fiscal policy front, U.S. and Russian officials are reportedly discussing terms for ending the Russo-Ukraine war after eleven years. While both sides have made it clear they will not unilaterally accept the terms proposed by the opposing side, the Trump team remains optimistic they can bring both Ukraine and Russia to the table.

?

This morning, the Empire Manufacturing Index rose from -12.6 to a reading of 5.7 in February, the highest reading in three months.

?

Also, this morning, the NAHB Housing Market Index is expected to fall one point to a reading of 46 in February.

?

Tomorrow, weekly mortgage applications along with January housing starts and permits will be released. Later in the afternoon at 2:00 p.m. ET, the meeting minutes from the January FOMC meeting will be released.

?

Later in the week, on Thursday, initial jobless claims, the Philly Fed Business Outlook Index, and the Leading Index for January will be released.

?

Wrapping up the week, on Friday, the S&P Global U.S. Manufacturing, Services, and Composite PMIs, the final February University of Michigan print, and January existing home sales reports will all be released.

?

-Lindsey Piegza, Ph.D., Chief Economist