The Independent Market Observer

Monday Update: Consumer Inflation Accelerates in January

Posted by Sam Millette

This entry was posted on Feb 14, 2022 12:00:48 PM

and tagged In the News

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monday updateThere were a number of important economic data releases last week, with a focus on international trade, consumer prices, and consumer sentiment. The reports showed that continued high levels of inflationary pressure weighed on consumer sentiment to start February. This will be a very busy week of updates, with reports scheduled to cover producer inflation, retail sales, industrial production, new home construction, and the minutes from the most recent Fed meeting.

Last Week’s News

On Tuesday, the December international trade balance report was released. The report showed that the trade deficit increased less than expected during the month. The deficit increased from a downwardly revised $79.3 billion in November to $80.7 billion in December against calls for a further increase to $83 billion. Imports increased 1.6 percent, which was more than enough to offset the 1.5 percent increase in exports in December. This capped off a year with historically large monthly international trade deficits, fueled by high domestic demand for goods throughout the year and an uneven global economic recovery. In fact, the total annual deficit of $859.1 billion was the largest on record, surpassing the previous record annual deficit of $763.5 billion that we saw in 2006. Looking forward, diminishing global medical risks are expected to help support a return to more normal international trade levels, but it will likely take some time to get our monthly trade deficit closer to historically normal levels.

Thursday saw the release of the Consumer Price Index report for January. Headline consumer prices increased 0.6 percent during the month and 7.5 percent on a year-over-year basis. The headline price growth was higher than economist forecasts for a 0.4 percent monthly and 7.3 percent annual increase. Core consumer prices also increased more than expected. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.6 percent during the month and 6 percent on a year-over-year basis against calls for 0.5 percent and 5.9 percent increases, respectively. The larger-than-expected increase for consumer prices during the month caused year-over-year consumer inflation to hit its highest level since the start of January 1982. Inflationary pressure was widespread during the month, as rising prices for services, goods, food, and energy all contributed to the increase in overall inflation. Looking forward, the Fed is expected to primarily focus on combating inflation in 2022 as the central bank looks to support its dual mandate of maximum employment and stable prices.

We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for February. This widely monitored measure of consumer confidence declined by more than expected during the month, dropping from 67.2 in January to 61.7 to start February against calls for a more modest drop to 67. This brought the index to its lowest level since 2011 and signals ongoing consumer concern about the state of the economy. Consumer views on both the current economic conditions and future expectations soured to start the month, which was a disappointing, although understandable, result given consumer concerns around inflation. Historically, higher levels of confidence have helped support faster spending growth, so this weak result could prove to be a challenging sign for spending growth.

What to Look Forward To

Tuesday will see the release of the Producer Price Index for January. Producer prices are expected to increase 0.5 percent during the month, from a 0.3 percent increase in December. On a year-over-year basis, however, producer inflation is set to decline from 9.7 percent in December to 9 percent in January. Core producer prices, which strip out food and energy prices, are set to increase 0.4 percent during the month and 7.9 percent on a year-over-year basis. Producer prices also faced notable inflationary pressure throughout much of 2021, driven by tangled global supply chains and rising material and labor costs. While inflationary pressure remains, we may have reached a peak for year-over-year producer inflation as we saw it hit 9.8 percent in November. If estimates hold, this would be a sign that inflationary pressure is starting to soften, as it would signal two consecutive months with lowered year-over-year producer inflation.

On Wednesday, the January retail sales report is set to be released. Retail sales are forecasted to rebound to start the new year following declines at year-end. Headline retail sales are set to increase 1.8 percent in January after falling 1.9 percent in December. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to increase 0.9 percent during the month following a 2.5 percent decline in December. The drop in sales in December was largely the result of rising medical risks and supply disruptions, and a quick rebound in January would be an encouraging sign that consumer demand remains robust despite these headwinds. Looking forward, further improvements on the medical front are expected to help support further spending growth in the months ahead, which would be a good sign for the pace of overall economic recovery.

Wednesday will also see the release of the January industrial production report. Industrial production is set to increase 0.4 percent during the month following a 0.1 percent decline in December. The anticipated rebound in production to start the year is due to declining medical risks and plant reopenings during the month. December’s decline in production was due, in large part, to plant shutdowns related to the Omicron variant, and these headwinds are expected to decline in January. Capacity utilization is expected to increase from 76.5 percent in December to 76.8 percent in January, which would mark the highest utilization rate since late 2019. Manufacturing output is also expected to rebound in January, as manufacturing production is set to rise 0.3 percent following a 0.3 percent decline in December. If estimates hold, this report is expected to show an encouraging return to growth for the manufacturing industry, which would help calm fears of a potential manufacturing slowdown to start the year.

The third major release on Wednesday will be the National Association of Home Builders Housing Market Index data for February. This widely monitored measure of home builder confidence is set to remain unchanged at 83 during the month. This is a diffusion index, where values above 50 indicate growth. So, if estimates hold, this would be a strong result signaling further construction growth. Home builder confidence rebounded swiftly once initial lockdowns ended in spring 2020, and the index has remained well above pre-pandemic levels. Record-low mortgage rates, a low supply of existing homes for sale, and shifting home buyer preferences for more space due to the pandemic have all supported home builder sentiment and new home construction. Looking forward, high levels of home builder confidence are expected to support continued construction growth in the months ahead.

The fourth and final major release on Wednesday will be the FOMC meeting minutes from the January Fed meeting. The Fed did not make any changes to interest rates at this meeting; however, the post-meeting press release and comments from Fed Chairman Jerome Powell at his post-meeting press conference both indicated that the Fed is likely to start raising rates at its next meeting in March. The Fed is also expected to shift its primary focus from providing supportive monetary policy aimed to get folks back to work to combating inflation through tighter policy in 2022. While the anticipated rate hikes would be a sign that the Fed views the economy as strong enough to withstand less supportive monetary policy, tightening this policy could lead to market volatility. Investors and economists will be closely analyzing the minutes from this meeting for any hints about the Fed’s upcoming plans and how the central bank views the current state of the economy.

We’ll finish the week with Friday’s release of the January existing home sales report. Existing home sales are expected to fall 1.3 percent during the month following a 4.6 percent decline in December. Despite the drop in December and the anticipated decline in January, the pace of existing home sales is expected to remain well above pre-pandemic levels. While sales have cooled compared to the surge in late 2020, the fact that sales remain above pre-pandemic levels highlights the continued level of home buyer demand we’ve seen since the start of the pandemic. Looking forward, a lack of available homes for sale, rising prices, and higher mortgage rates are all expected to serve as headwinds for significantly faster sales growth. If we continue to see sales remain near current levels, it would be a sign of a healthy housing market.

That’s it for this week—thanks for reading!

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