Weekly Economic Trends and Indicators

The Headline:

Two important reports on inflation were released by the Bureau of Labor Statistics (BLS) this week. On Wednesday, the BLS reported that the Consumer Price Index (CPI) rose by a seasonally adjusted 0.5% in January, which was above expectations. On an annual basis, the CPI inflation rate was 3.0% for the 12 months ending in January, this was up from 2.9% for the 12 months ending in December.

On Thursday, the BLS reported that the Producer Price Index (PPI) for final demand rose by a seasonally adjusted 0.4% in January. On an annual basis, the PPI for final demand increased by 3.5% for the 12 months ending in January.

The Details:

After removing the more volatile components of food and energy from the CPI, the increase was 0.4% for the month and 3.3% for the last 12 months. Egg prices, in particular, have received much attention in recent weeks as the avian flu has led to a drastic reduction in the supply of eggs. Energy prices have also spiked recently, though energy commodity prices are still lower over the entire 12-month period.

Many of the other sectors in which prices have risen the most are familiar to anyone who has followed this news over the last couple of years. Health care, motor vehicle repairs and insurance, airline fares, and music and video streaming services are some of the areas experiencing price increases. However, the most important component in the core CPI is shelter (housing). Rent and owners’ equivalent rent have increased by over 4% in the past year with monthly increases that have been quite consistent.

The Context:

The CPI news came as Federal Reserve Chair Jerome Powell was about to present his second day of semi-annual testimony to Congress. He told the House Financial Services Committee that, “We are close but not there on inflation. Today’s inflation print… says the same thing.” Still, while the market’s implied probability of interest rate cuts fell significantly after the CPI news, the PPI news moved things back in the other direction just slightly. This is because, while the PPI inflation data was fairly warm, it was better for sectors that feed into the Personal Consumption Expenditures (PCE) price index. The PCE price index is most closely watched by the Fed. Most now expect that when the January PCE is released in two weeks that it will increase less than the CPI.

As we reported last week, inflation expectations are increasing, and the visibility of certain price increases such as gasoline and eggs have consumers slightly rattled. All eyes will be on the PCE data at the end of the month.

Next week: Manufacturing update