Jan. Consumer Prices, Real Earnings, Durable Goods Orders, Weekly Jobless Claims
Economics in a nutshell: “Low inflation is improving household spending power and with the dam that has been holding back wage gains starting to break, we could continue to see solid income increases even without declines in gasoline prices.”
INDICATOR: Jan. Consumer Prices, Real Earnings, Durable Goods Orders, Weekly Jobless Claims
KEY DATA: CPI: -0.7%; Excluding Food and Energy: +0.2%/ Real Hourly Earnings: +1.2%/ Durable Orders: +2.8%; Excluding Aircraft: -0.3%/ Claims: +31,000
IN A NUTSHELL: "Low inflation is improving household spending power and with the dam that has been holding back wage gains starting to break, we could continue to see solid income increases even without declines in gasoline prices."
WHAT IT MEANS: The missing link may no longer be missing. Consumer incomes have been stagnant for seven years, but that may be changing, helped in no small part by low inflation. The Consumer Price Index declined again in January, which hardly surprised anyone as energy prices completed their downdraft during the month. Indeed, energy commodity prices fell by 18%. Unfortunately, that will be reversed in February. Excluding energy, prices rose modestly, but they are up by nearly 2% over the year. Food costs were flat but not for bakery products. Oh, well. Also, restaurants continue to raise prices. There were moderate increases in shelter and apparel as well. At least medical care costs are under control. Services inflation continues to increase. They were up moderately in January and have increased by 2.4% over the year. Remember, services are almost 60% of the index.
The resolve to keep compensation from rising at all costs may finally be dissolving. Wages increased solidly in January. The Wal-Mart Effect may drive up wages even faster as more companies are starting to match their hourly wage hike. While unemployment claims rose, the four-week average remains at a level that implies continued strong job gains and rising pressure in the labor market. The decline in prices led to a sharp increase in inflation-adjusted wages, which was nice to see, even if the uptick in energy costs moderates that next month.
Durable goods demand rebounded in January, but it was all in aircraft. Removing that component, orders fell slightly. But there was a positive sign in this report. Business investment spending looks like it may be bouncing back. Capital goods orders, excluding aircraft and defense, jumped.
MARKETS AND FED POLICY IMPLICATIONS: The headline inflation number looks great, but it just may be fools gold. The future course of inflation is not as clear as so many, including those at the Fed, think. Services prices continue to increase at a pace in excess of the Fed's target. Even energy services prices are up, increasing 1.9% over the year. The decline in energy commodity prices and its moderation of other inflationary pressures, is the primary factor in the low inflation rate. Indeed, non-energy prices are up pretty close to the Fed's 2% target and additional large oil price declines are not likely. I would not be surprised if the headline number, the all items less energy component and the core (less food and energy) are all in the 2% range by mid-year. Inflation may not be a major problem, but it is also not a nonevent. The Fed needs to drop its "patience" descriptor and start preparing the markets for a rate hike. Investors are not "fearing the Fed", but they should start doing that.
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