Jump in PPI Reinforces Inflation Concerns, Keeps Fed Sidelined

This morning, the PPI rose 0.3% in January, significantly more than expected, and resulting in a 0.9% increase year-over-year. Excluding food and energy costs, the core PPI jumped 0.5% at the start of the year, also more than double forecasts, and 2.0% over the past 12 months, reversing course from a 1.7% pace in December.

In the details, goods costs fell 0.2% in January with food prices off 0.3% for the month. Energy costs also continued their retreat for the fourth consecutive month, down 1.7% in January. Services costs, on the other hand, rose 0.6%, the most in almost a year.

The latest hotter-than-expected producer price report comes on the heels of a notably hotter consumer price report earlier this week.

Recall, on Tuesday, the CPI rose 0.3% in January, a tenth of a percentage point more than expected and following a 0.2% gain in December. Year-over-year, consumer prices rose 3.1%, down from the 3.4% rise in December and a two-month low. However, according to the median forecast, the CPI was expected to rise 2.9% over the past 12 months.

Food prices rose 0.4%, while energy prices declined 0.9% in January, the fourth consecutive month of a decline in energy prices.

Excluding food and energy costs, the core CPI rose 0.4% in January, a tenth of a percentage point more than expected and following a 0.3% increase the month prior. Year-over-year, the core CPI increased 3.9%, matching the 3.9% gain in December. According to the median forecast, the core CPI was expected to increase 3.7%.

Another iteration of inflation, the supercore, which excludes food and energy as well as housing, rose 0.9% in January, the largest monthly gain since April 2022, and rose 4.4% over the past 12 months, up from the 3.9% annual gain in December and now marking the fastest pace since May.

Bottom Line: Producer and consumer prices rose significantly more than expected at the start of the year reinforcing the uneven nature of disinflation. Of course, while one month’s data is not enough to significantly alter or shift the thinking at the Fed in terms of a sufficient terminal rate, the ongoing sticky nature of inflation and upside risks patricianly stemming from international factors should perpetuate the Committee’s lack of confidence in a sustainable downward trend in prices back to 2% and compound the need for patience. The market is anxious for near term rate cuts; however, the lack of downward momentum and recent uptick suggests investors are likely to be disappointed, with policy on hold for some time longer than expected, certainly to the second quarter but more likely until the second half of the year.

Also, this morning, housing starts fell 14.8% in January to a 1.33M unit pace while building permits slid 1.5% at the start of the year to a 1.47M unit pace.

And, consumer confidence inched up slightly from 79.0 to a reading of 79.6 in the preliminary February report, the third consecutive month of improvement and the highest reading since July of 2021. In the details, current conditions slid down slightly from 81.9 to 81.5, while expectations gained from 77.1 to a reading of 78.4.

Bottom Line: While inflation remains elevated and nominally prices are significantly higher than before the pandemic, households are relatively optimistic given the pace of inflation is largely cooling. Coupled with a strong economy, solid labor market and positive wage growth, the average American is still feeling a pinch from current conditions but proving surprisingly resilient.

Yesterday, retail sales dropped 0.8% in January, more than the 0.2% decline expected and the largest monthly drop since February of last year. Year-over-year, retail sales rose 0.6% in January, down from the 5.3% annual rise in December and the weakest annual increase since May 2020.

Car sales fell 1.7% in January following a 0.3% increase the month prior, and gasoline stations sales also slipped 1.7%, the fourth consecutive month of decline. Excluding autos, retail sales fell 0.6% in January and climbed 1.2% over the past 12 months. Excluding autos and gasoline, retail sales declined 0.5% and increased 2.2% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales declined 0.4% in January and rose 2.5% over the past 12 months.

In the details of the report, building materials sales fell 4.1%, miscellaneous sales dropped 3.0%, health and personal care sales fell 1.1%, and non-store retailer sales declined 0.8% in January. Also, sporting goods sales and clothing sales both decreased 0.2%, and electronics sales fell 0.4%, the third consecutive monthly decline. Additionally, general merchandise sales were flat (0.0%), despite a 0.5% rise in department store sales. On the other hand, food and beverage sales rose 0.1%, eating and drinking sales increased 0.7%, and furniture sales rose 1.5% in the first month of the year.

Bottom Line: Retail sales proved weaker than expected at the start of the year with broad-based weakness across key categories. However, rather than a reflection of a faltering consumer, the decline was likely primarily the result of particularly unfavorable winter weather in early January. While the damage is already done, expectedly pulling down estimates for Q1 growth, it will take further consecutive months of weakness to undermine the “resilience” of the consumer. Thus, retail data will be of particular importance next month.

Also, yesterday, initial jobless claims fell by 8k to 212k in the week ending February 10, a one-month low. The four-week average, however, rose from 213k to 219k. Continuing claims, or the total number of people claiming ongoing unemployment, rose from 1.865M to 1.895M.

And, a look at regional manufacturing activity in New York and Philadelphia. The Empire Manufacturing Index rose from -43.7 to a reading of -2.4 in February, a three-month high. According to the median forecast, the index was expected to rise to -13.8. In the details of the report, prices paid rose from 23.2 to 33.0, and prices received increased from 9.5 to 17.0 in February, a five-month high. Additionally, new orders rose from -49.4 to -6.3 and the number of employees increased from -6.9 to -0.2, averaging -3.3 over the past 6 months. Also, the six-month general business conditions index increased from 18.8 to 21.5 in February, a fourmonth high. On the other hand, inventories fell from -7.4 to -9.6 in the second month of the year.

The Philly Fed Index rose from -10.6 to +5.2 in February, surpassing the expected gain to -8.1, and a six-month high. In the details of the report, prices paid rose from 11.3 to 16.6, averaging 18.5 over the past six months, while prices received ticked down from 6.3 to 6.2. Also, new orders rose from -17.9 to -5.2, while the number of employees dropped from -1.8 to -10.3 in February.

Additionally, import prices rose 0.8% in January following a 0.7% decline in December. According to the median forecast, import prices were expected to be unchanged at the start of the year. Meanwhile, export prices also unexpectedly rose 0.8% in January following a 0.7% drop in December. Over the past 12 months, import prices slipped 1.3% and export prices declined 2.4%, up however from the 2.4% and 2.9% drop, respectively, in December.

Also, industrial production fell 0.1% in January following a flat reading the month prior. Capacity utilization, meanwhile, declined from 78.7% to 78.5% in January, a four-month low.

Additionally yesterday, business inventories rose 0.4% in December, as expected and following a 0.1% decline the month prior.

Finally yesterday, ahead of this morning’s housing starts and permits, the NAHB Housing Market Index increased four points to a reading of 48 in February, a six-month high.

Next week, the economic calendar is relatively light given the market closure on Monday in observance of President’s Day.

On Tuesday, the Leading Index is expected to decline 0.3% in January following a 0.1% decline in December.

On Wednesday, MBA mortgage applications will be released, along with the FOMC meeting minutes from the Fed’s January 30-31 meeting.

Later in the week, on Thursday, initial jobless claims, S&P Global U.S. Manufacturing, Services and Composite Indices, along with January existing home sales will all be released.

On Friday, the economic calendar is empty.

-Lindsey Piegza, Ph.D., Chief Economist