CPI, Retail Data Not Pretty But May Overstate U.S. Economic Pain

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Faster-than-projected U.S. inflation and an unexpected decline in retail sales at the start of the year may cause some indigestion on Wall Street, but probably don’t mean much pain for the economy.

The core consumer price index, which excludes volatile food and energy costs, rose 0.3 percent in January from the prior month, the biggest advance in a year and exceeding the 0.2 percent median estimate of economists, a Labor Department report showed Wednesday. Separate figures showed purchases at retailers dropped 0.3 percent after a downward revision to December.

Treasuries slumped and investors marked up expectations for Federal Reserve interest-rate increases. The inflation report was hotly anticipated following robust wage data earlier this month that sent yields higher and started a rout in equities that pushed the main indexes into the first correction in two years.

While the retail figures support analyst forecasts that consumption will slow this quarter on the heels of the biggest quarterly advance in more than a year, consumer spending will likely be buttressed this year by wage growth, a tight labor market and tax cuts.

“These reports tell two stories: one, that the real economy may not be as strong as we thought, but also that inflation may be a bit higher,” said Paul Ashworth, chief U.S. economist for Capital Economics. “The Fed looks like they’re leaning towards the inflation part of the story.”

Fed funds futures show that the market is now pricing in two full quarter-point increases through the central bank’s September meeting, and that the overall amount of tightening being anticipated for this year and next has rebounded close to levels seen earlier in February. 



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