– February 15, 2017
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The U.S. consumer continues to drive the economy. The latest data from the U.S. Commerce Department show retail sales rose 0.4 in January percent following a 1 percent jump in December. Combined with other recent data on the economy such as job creation, initial claims for unemployment insurance, Institute for Supply Management survey results, and consumer prices, the evidence strongly supports further Federal Reserve interest rate increases in coming months.

The strong gain in retail sales in January put the year-over-year increase at 5.6 percent, the strongest 12-month gain since March 2012. For the three months ending with January and including the critical holiday spending months, retail sales rose 1.7 percent compared with the prior three-month period and 4.6 percent versus the November 2015-to-January 2016 period. In the November edition of our Business Conditions Monthly publication, we made the case for an optimistic outlook for the holiday spending season.  Today’s results vindicate our views.

January retail sales were led by gains in gasoline, sporting goods, electronics and appliances, and restaurants. The weakest category was auto sales, with a 1.4 percent decline, but that drop followed an extremely strong 3.2 percent gain in the prior month.

Other data out today include the Empire State Manufacturing Survey from the Federal Reserve Bank of New York. The general business conditions index rose to 18.7 in February from 6.5 in January (zero is neutral). In addition, the new orders and shipments indexes rose to 13.5 and 18.2, respectively.  All three indexes are at their highest levels since 2014.

Finally, the U.S. Bureau of Labor Statistics released the Consumer Price Index for January.  The index rose 0.6 percent for the month, well above expectations. The jump was driven largely by a surge in energy prices, primarily gasoline. Gas prices rose 7.8 percent for the month and are up 20.3 percent from a year ago. Excluding energy and food prices, the core CPI rose 0.3 percent for the month and is up 2.3 percent from a year ago.  The jump in the January core CPI was led by increases in apparel (up 1.4 percent) and new vehicle prices (up 0.9 percent).  However, such gains are not typical for those categories. From a year ago, apparel prices are up just 1 percent, while new vehicle prices have risen 0.9 percent.

In general, core goods price increases remain almost nonexistent. Core goods are down 0.2 percent over the past year and are up at an annualized rate of just 0.1 percent over the past 20 years. Price increases in the CPI continue to come from shelter (up 3.5 percent over the past year), which accounts for about one-third of the CPI, medical-care commodities (up 4.7 percent), and medical-care services (up 3.6 percent).

As measures of economic activity show accelerating momentum and price index increases approach Fed targets, pressure will mount for the Fed to continue to raise the federal funds rate target, with three quarter-point increases in 2017 the likely path.

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Robert Hughes

listpg_hughes Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
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