An Expected Moderate Increase in Prices Keeps Headline US CPI Inflation Mostly Unchanged
Economic news and commentary for February 14, 2023
US CPI & NFIB Small Business Optimism Index
US CPI grew 0.5% MoM and 6.4% YoY in January, down from 6.5% YoY in December. The moderate monthly increase in prices to start 2023 is in line with expectations that higher energy prices would return after two monthly declines. Up 2.0% MoM, energy prices grew on a 6.7% MoM increase in natural gas prices and a 2.4% MoM increase in gas prices. Food prices remained consistently high as a result of another moderate increase in the month of 0.5% MoM. However, a large increase in egg prices, 8.5% MoM, overshadowed smaller increases and slight decreases elsewhere. Fruits and vegetable prices fell -0.5% MoM. Just as headline CPI growth decelerated -0.1 ppts, so did core CPI growth. The core CPI index increased 0.4% MoM for the second month in a row and grew 5.6% YoY. Core goods prices helped to drive disinflation, up just 1.4% YoY now, after being the main source of inflationary pressure for the majority of 2022. The dramatic decline in used car and truck prices has played a large part in the cooling in the last six months after posting five straight declines of -1% or lower. The subindex is now down -11.6% YoY. Auto inflation has passed the torch to the shelter index which continued its steady climb in January, up another 0.7% MoM to 7.9% YoY. This made services inflation stick above the 7% level with an annual increase of 7.2% YoY. Other core categories were more mixed with apparel up 0.8% MoM, recreation up 0.5% MoM but medical care down -0.4% MoM.
The moderate increase in prices was the largest since October 2022 but was largely expected after a few releases pointed towards a general disinflationary trend. There is a general understanding that the road towards target inflation will be volatile and include reports like this especially if the economy is going to walk the soft landing tightrope. Additionally, there is an understanding that a strong labor market with high vacancies and below-normal supply is likely to be supportive of demand and consumer activity until there is a more acute disruption to consumers’ financial situations. We shouldn’t be worried that inflation only slowed -0.1 ppts to 6.4% YoY in January, but we should be prepared for the Fed to follow through on its own expectations of what monetary policy needs to be. This includes respecting the hawkishness that has been communicated by Chair Powell in the February FOMC meeting and his speech a week or so after. It seems likely that the Fed will see two more rate hikes in March and May as an imperative to keep inflation dynamics on the path it sees to 2%. And don’t expect any rate cuts this year unless we see data veer into unexpected territory.
The NFIB Small Business Optimism Index grew 0.5 pts to 90.3 in January. The biggest news in the popular small business survey was that owners are starting to see inflation as less of a problem. 26% of owners reported inflation as the most important problem in the most recent survey. This was down -6 ppts from the percentage that responded in the affirmative in December. Despite that, there was some mixed messaging in the indexes tracking current and future price changes. The “Actual Price Changes” index fell -1 pt to 42 while the “Price Plans” index actually increased 5 pts to 29. However, it is worth noting that the latter index is down -16 pts from a year ago. There is also a general sense that consumer demand is set to weaken in the near future despite a slight improvement in economic expectations. The percentage of owners expecting real sales to to be higher fell -4 pts to a net -14%. As a result, there are increasing calls to reduce inventories. The percentage of owners planning on adding to inventories was down -4 pts to -8%.
Amidst all this, labor demand remained very strong. Almost half of the respondents (45%) said there were job openings that couldn't be filled, up 4 pts from December. Because of this, a net 46% of owners reported raising compensation so that they could fill those openings. This reflected the tight labor market described in NFIB’s January jobs report where “57% of owners reported hiring or trying to hire in January. Of those hiring or trying to hire, 91% of owners reported few or no qualified applicants for the positions they were trying to fill.” This report confirms the Fed’s worry that the labor market is far from contracting which is putting upward pressure on wages. While goods inflation may be waning, this dynamic will be front and center in policy discussions.
UK Employment
The UK added 102,000 jobs in February, another month of strong job gains despite some weakness being displayed in the economy by the recent GDP report. Though the unemployment rate inched up 0.1 ppts to 3.7% in the three months to February, this was likely a result of the inactivity rate falling -0.3 ppts to 21.4%. However, the labor supply is still well below pre-pandemic levels. As a result, the level of job vacancies in the UK remains elevated, over 1.1 million, despite a -76,000 decline in the three months to February. Amidst signs of a strong labor market, the redundancy rate has ticked up to 0.8 people per thousand, but this is still below the pre-pandemic level and not a major issue. Wage growth, instead, looks to be a major issue in terms of inflation. Growth in regular pay (which doesn’t include bonuses) was 6.7% QoQ in Q4 2022 which is the highest wage growth outside of the COVID period. For the private sector, this regular pay growth was 7.3% QoQ, another record. While these rates still pale in comparison to the elevated inflation levels, they threaten to sustain a wage-price spiral that would create more entrenched price pressures. The Bank of England has been one of the central banks looking to slow down its tightening as growth figures come in near 0, but data like this suggest this may not be possible unless it wants to risk letting hot inflation stick around for longer.
Still to come…
No other major economic releases today
Morning Reading List
Other Data Releases Today
The Australian Westpac Consumer Sentiment Index fell -6.9% MoM to 78.5 in February. Higher rates have put "intense pressure" on consumer finances, especially through mortgage rates. Confidence around jobs was still positive though.
The Australian NAB Monthly Business Survey Business Conditions index improved 5 pts to 18 in January. The Business Confidence index also rose, 6 pts to 6. Input price growth over the quarter accelerated to 3.2% QoQ from 2.6% QoQ previously.
Japanese GDP growth was 0.2% QoQ in Q4 2022, up from -0.3% QoQ in Q3 2022. While private consumption grew 0.5% QoQ, non-residential investment offset that growth with a -0.5% QoQ decline. Overall, private demand fell -0.4% QoQ.
The French unemployment rate edged down -0.1 ppts to 7.2% in Q4 2022. The long-term unemployment rate was 1.9%, the lowest since Q3 2009. The activity rate fell -0.1 ppts to 73.6%.
German whole selling prices grew 0.2% MoM and 10.6% YoY in Jan, down from 12.8% YoY in Dec. Energy prices fell -4.4% MoM to account for a large chunk of the deceleration in the annual pace.
The flash estimate for Q4 2022 GDP growth in the euro area was confirmed at 0.1% QoQ. Additionally, employment growth for Q4 was 0.4% QoQ and 1.5% YoY.
UK Employment
UK wage growth points to another rate hike in March (ING) - There's little sign that UK wage growth has reached a peak, and the jobs market looks reasonably healthy. A 25bp rate hike at the March meeting seems likely.
Japan’s sluggish GDP growth and Kazuo Ueda nominated as the new BOJ chief (Saxo Bank) - Japan’s Q4 growth has surprised on the downside, but tailwinds still ahead as China reopening gathers pace. Meanwhile, Kazuo Ueda was nominated as the new Bank of Japan governor to succeed Kuroda when he steps down in April. Ueda has not been in touch with policymaking for over 15 years, and is unlikely to be in a rush to normalize policy even though he appears to be unwelcoming of long-term yield curve control. Japan equities still look promising as a result.
Japan GDP
Japan: 4Q22 GDP rebounded, but less than expected (ING) - We expect the modest recovery to continue this year, but it is questionable whether it is going to be strong enough for the Bank of Japan to make progress in normalization as rapidly as expected by the market.
US
Lion on a Leash: Negative Animal Spirits Index in January (Wells Fargo) - The Animal Spirits Index (ASI) slipped to -0.24 in January, down from -0.06 in December. January's decline marks the 13th consecutive month that the ASI has been in negative territory. The crosscurrents within the ASI's components are indicative of the broader economic picture today. A mild recession in the second half of this year is still the most likely outcome in our view, but the odds of a soft landing are rising.
US Weekly Economic Commentary: Inching towards recession as markets play chicken with the Fed (S&P Global) - Data on international trade and wholesale inventories for December proved close to our expectations in a light period for major releases last week. Accordingly, we made little change to our estimate of first-quarter real GDP growth of -1.2%. Such a contraction is suggested by the weakening monthly profiles of final private domestic demand and industrial production late last year, and an unsustainably strong contribution to growth in the fourth quarter from inventory investment.
January Data Get Hot (First Trust Portfolios) - Markets have been volatile, with reports convincing many that the Fed is done hiking rates. But this week, we get data that may change some minds. Why? Because the economic reports for January are likely to come in hot, with inflation, retail sales, industrial production, and housing starts all potentially coming in at the fastest pace in months.
Do a High Vacancy Rate and Labour Hoarding Imply Slow Disinflation? (BNP Paribas) - In the US, the ratio between the job openings rate and the unemployment rate remains very elevated. It is one sign amongst many of a very tight labour market. As growth slows down, this ratio should decline. Historically, this has been accompanied by slower wage growth. It can be argued that this time, this process may take more time due to labour hoarding, which should limit the increase in layoffs and hence the unemployment rate, and the high level of the vacancy rate, which should underpin the creation of new jobs. This means that there is a genuine risk of disinflation to be slow.
Monetary Policy
Fedspeak Monitor: The hawks are lining up again (Saxo Bank) - Market expectations for the Fed path has come back in-line with the December dot plot, with Fed speakers turning hawkish at the margin since the bumper January jobs report. While US CPI is key early in the week, focus will shift back to Fed commentaries later in the week.
NAB Monetary Policy Update – 14 February 2023 (NAB) - Following the first RBA meeting of the year and the release of the February SoMP, NAB now sees the RBA lifting rates to a peak of 4.1% in May, including 25bp increases at each of the next three meetings.
Preparing for Japan central bank shift (BlackRock) - The Bank of Japan looks set to change its ultra-loose policy as inflation takes root. We see spillover risks to global yields, risk appetite and Japanese stocks.
Rates, not roses (Allianz) - The long Goodbye to zeronomics and its implications for the private and public sector.
Employment
Why Is Employment Still So Strong? (BMO) - Trying to catch up with elevated demand while facing worker shortages and illnesses, U.S. and Canadian businesses continue to hire in large numbers, raising hopes the recession will be averted or at least be mild. A less sanguine view, however, is that the buoyant labour market might only postpone the downturn, adding stickiness to wage and price growth and more rate hikes to an already aggressive tightening cycle—a situation that would likely not end well.
Real Estate
Materials Remain Builders’ Top Challenge, but Inflation and Interest Rates are Threatening (NAHB) - The price and availability of building materials again topped the list of problems builders faced last year, while interest rates (along with general inflation and negative media reports) moved considerably up the list.
Russia-Ukraine War
Russia-Ukraine war: One year on (S&P Global) - Russia is continuing its bombardment of Ukraine, with the conflict now nearly a year on, to wear down the Ukrainian population's support for the war and initiate ceasefire negotiations that would freeze the 1,000-km line of contact.
Markets
The VIX Index takes a plunge: What does it mean for the markets? (Wells Fargo) - The recent plunge in the Chicago Options Exchange Market Volatility Index (VIX) stems from the market’s expectation that the Federal Reserve (Fed) will soon pause interest rate hikes, and then pivot to cutting rates in the second half of the year.
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