The Independent Market Observer

Monday Update: Consumer Inflation on the Rise

Posted by Sam Millette

This entry was posted on Mar 14, 2022 10:26:41 AM

and tagged In the News

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Monday UpdateSeveral important economic updates were released last week, with a focus on international trade, consumer inflation, and consumer sentiment. The February consumer inflation report drew the most market attention, as it showed that inflationary pressure continued to rise. This will be a very busy week of updates with scheduled reports that will cover producer inflation, retail sales, the housing market, industrial production, and the March Fed meeting.

Last Week’s News

We started the week with Tuesday’s release of the January international trade balance report. The trade deficit widened by more than expected during the month, increasing from an upwardly revised $82 billion in December to $89.7 billion in January against calls for an increase to $87.3 billion. This represents a new record monthly deficit and marks two consecutive months with record-setting deficits. The widening was due to a 1.2 percent increase in imports combined with a 1.7 percent decline in exports. Part of the larger-than-expected import growth was due to rising energy prices that inflated the value of oil and gas imports; however, goods imports increased notably as well to start the year, as businesses continued to buy foreign products to restock inventories. Given the increased deficit to start the year, international trade may serve as a headwind for overall economic growth in the first quarter.

Thursday saw the release of the February Consumer Price Index report. It showed that the pace of monthly and year-over-year consumer inflation increased in February. Consumer prices increased 0.8 percent during the month, which was up from the 0.6 percent rise in prices that we saw in January but in line with economist estimates. On a year-over-year basis, consumer inflation increased from 7.5 percent in January to 7.9 percent in February. This marks the highest annual increase in consumer prices since 1982. Inflationary pressure was widespread, as seen by the high level of core consumer inflation. Core consumer prices, which strip out the impact of food and energy prices, increased 0.5 percent during the month and 6.4 percent on a year-over-year basis. Consumer prices have experienced significant inflationary pressure throughout the past year, driven by high levels of consumer demand, shipping bottlenecks, and rising material and labor costs. The recent Russian invasion of Ukraine is also expected to contribute to short-term inflationary pressure, primarily from higher energy and food prices.

We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. Consumer confidence fell by more than expected to start the month, as the index dropped from 62.8 in February to 59.7 in March against calls for a more modest decline to 61. This drop was largely due to declining consumer optimism for future economic conditions, which, in turn, was largely due to rising short-term inflation expectations. The report showed that one-year inflation expectations increased from 4.9 percent in February to 5.4 percent in March, which was well above economist estimates for an increase to 5.1 percent. Food and gas prices were already rising before the Russian invasion of Ukraine, and the conflict likely contributed to the surge in inflation expectations during the month. We’ll likely need to see inflation cool before we see consumer confidence get back to pre-pandemic levels.

What to Look Forward To

On Tuesday, the February Producer Price Index report will be released. Economists expect to see annual producer inflation accelerate during the month, with headline prices set to rise by 1 percent in February and 10 percent on a year-over-year basis. As was the case with consumer inflation, producer inflation is expected to be widespread across most sectors. Core producer prices, which strip out the impact of volatile food and energy prices, are set to increase 0.6 percent during the month and 8.7 percent on a year-over-year basis. Producers have had to contend with rising labor and material costs over the past year, and the recent rise in energy and commodity prices is expected to fuel additional inflation in the months ahead. The consistently high levels of both consumer and producer inflation are expected to drive the Fed to tighten monetary policy throughout the year to tamp down the recent price increases.

On Wednesday, the February retail sales report is set to be released. Retail sales are expected to increase 0.3 percent during the month following a 3.8 percent increase in January. January’s surge in spending was largely a rebound following a decline in spending in December, so the anticipated slowdown in February is understandable. Core retail sales, which strip out the impact of volatile gas and auto sales, are set to increase 0.6 percent following a 3.8 percent increase in January. The January retail sales report showed that consumer demand remained strong to start the year despite headwinds created by the Omicron variant. If we see another month with rising retail sales, it would be an encouraging sign that consumers remain willing to go out and spend, which would be a good sign for overall economic growth.

Wednesday will also see the release of the National Association of Home Builders Housing Market Index for March. This measure of home builder confidence is set to decline slightly from 82 in February to 81 in March. This is a diffusion index where values above 50 indicate growth, so this would still be a strong result despite the anticipated decline. Home builder confidence has been well supported for the past two years, as prospective home buyer demand surged following the expiration of initial pandemic lockdowns. The supply of existing homes available for sale remains low on a historical basis, which has helped keep home builders confident that any newly built homes will be quickly purchased. Historically, high levels of home builder confidence have helped support faster construction growth, which we’ve seen throughout the pandemic.

The final major release on Wednesday will be the FOMC rate decision from the Fed’s March meeting. The Fed is expected to hike the federal funds rate by 25 basis points, which would represent the first rate hike since the Fed cut interest rates to virtually zero in March 2020 at the start of the pandemic. The Fed has provided unprecedented levels of support to the economy over the past two years, and the anticipated rate hike would be a step toward normalizing monetary policy. Given the labor market improvements since the expiration of initial lockdowns and the high levels of inflation throughout the economy, the Fed is expected to continue tightening policy throughout 2022 to combat rising prices. Economists and investors will be paying close attention to the post-meeting press release as well as Chairman Powell’s press conference to see if there are any hints on the expected path and pace of future Fed action. Markets are currently pricing for up to six potential rate hikes throughout the year, so this meeting is expected to be a starting point for hikes but by no means an end point.

On Thursday, the February housing starts and building permits reports are set to be released. Economists expect to see mixed results, as starts are expected to increase 3.8 percent during the month, while permits are set to fall 1.7 percent. Building permits currently sit at their highest level since 2006, so the modest anticipated decline is not a major concern for this often volatile report. Housing starts declined in January but remain well above pre-pandemic levels, bolstered by continued high levels of home builder confidence, strong home buyer demand, and a lack of existing homes for sale. Given the continued low level of available homes for sale and rising housing costs, any additional construction would be a good sign for the health of the overall housing market.

Thursday will also see the release of the February industrial production report. Production is expected to increase 0.5 percent during the month, following a 1.4 percent increase in January. Manufacturing output, which rose by a relatively muted 0.2 percent in January, is set to increase 1.1 percent in February, largely due to the declining health risks from the Omicron variant that allowed factories to reopen. Capacity utilization is set to increase from 77.6 percent in January to 77.9 percent in February, which would represent the highest utilization rate since mid-2019. If estimates hold, this report would be an encouraging sign that the slowdown in production we saw at the end of 2021 was largely driven by rising medical risks due to Omicron and is largely behind us for now.

We’ll finish the week with Friday’s release of the February existing home sales report. Sales of existing homes are set to drop 4.6 percent during the month following a better-than-expected 6.7 percent increase in sales in January. The strong January result brought the pace of existing home sales to a one-year high. Even with the anticipated pullback in February, the pace of existing home sales is expected to remain above pre-pandemic levels. Part of the January surge in sales was likely due to prospective home buyers rushing to lock in low mortgage rates given expectations for higher rates in 2022, which explains the anticipated pullback in February. Looking forward, rising prices, a lack of available homes for sale, and rising mortgage rates are all expected to serve as headwinds for faster home sales growth, but home buyer demand is expected to remain strong and could help support sales near current levels.

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

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