UK Services Inflation Surprises on the Downside, US Retail Sales Surprises to the Upside
Economic news and commentary for February 15, 2023
UK CPI & PPI
UK CPI fell -0.6% MoM to 10.1% YoY in January, down from 10.5% YoY in December. The year starts with inflation in the UK falling at a solid pace helped by negative contributions in the transport services and recreation components. In particular, the subindex for travel & transport services fell -5.9% MoM, and the subindex for recreational & personal services fell -0.8% MoM. Both of these helped to drive a surprise decline in services inflation which saw a monthly decline of -1.0% MoM and a slowdown of the annual pace from 6.8% YoY to 6.0% YoY. Outside this major development, goods deflation was more contained, down just -0.2% MoM with the annual pace down just -0.1 ppt to 13.3% YoY. The volatile categories looked to have mostly offset each other with food prices up 1.2% MoM and energy prices down -1.0% MoM. Meanwhile, the core goods segment of non-energy industrial goods fell -0.9% MoM to push the overall index lower. All of this means that core CPI fell -0.9% MoM and annual core inflation fell below the six percent threshold to 5.8% YoY.
This report marks considerable progress in the battle against inflation for the Bank of England (BoE). Yes, it has come at a cost of economic expansion, but prices do appear to be heading in the right direction (with the exception of food prices). The development in services inflation is especially encouraging as it is in the BoE’s focus as it was mentioned directly in the February Monetary Policy Summary as being “notably higher than forecast.” It’s hard to say whether this is the new trend as month-to-month movements are rarely sustained, and there is still a long way down to 2%. However, it is worth noting that the annualized 3-month moving average of monthly service inflation is a tiny 0.03% which means that for the last quarter, the trend is very favorable to the Bank of England.
Producer prices in the UK are also moving in the right direction. UK input prices were up 14.1% YoY in January, which is down from 16.2% YoY in December, and output prices were up 13.5% YoY, which is down from 14.6% YoY. Inputs of crude oil, and petroleum products, provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. Specifically, we see that fuel input prices were down -2.5% MoM and petroleum product prices fell -2.7% MoM. Metal producer prices provided an offsetting impulse on both the input and output price side with the former up 1.5% MoM and the latter up 1.0% MoM. The largest upward contribution to the annual input inflation rate continues to come from this metals & non-metallic mineral products component, which contributed 3.17 ppts to headline input PPI growth. The persistent volatility in global steel prices and energy costs continue to affect the price of these materials. Food input prices are also an issue with its contribution being the second highest at 2.37 ppts. The struggle to reach disinflation in these two categories suggests there is still some pressure on prices as a result of supply chain complications, especially related to the war in Ukraine. This will continue to put pressure on corporate profits in the UK and keep CPI inflation from decelerating at a faster rate.
US Retail Sales
Retail sales jumped a robust 3.0% MoM in January to overturn a dismal -1.1% MoM decline in December. Multiple categories saw sales up over three percent with the largest increase in the motor vehicle and parts sector, up 5.9% MoM. This can be traced back to a temporary surge in purchasing by rental companies purchasing new vehicles. Excluding this effect, ex-auto retail sales still grew a solid 2.3% MoM. The categories that boosted this core segment were furniture sales, up 4.4% MoM, and electronics sales, up 3.5% MoM. Additionally, we saw a jump in food services & drinking places sales at a rate of 7.2% MoM, likely a result of warmer weather in January luring out consumers at a higher rate than usual. Gas station sales were one area of a few that were weak, building off of a weak -4.8% MoM drop in December. The others were food & beverage stores, up just 0.1% MoM, building materials, up just 0.3% MoM, and sporting goods & other hobby stores, up 0.2% MoM.
What is the bottom line? Consumers are strong. The continued boom in the labor market is doing well to support incomes. The boom is amplified by higher wages which will continue to have a more noticeable impact on spending as prices recede, and consumers can afford more things. While this is a tailwind for economic growth, it is creating upward pressure on prices to the Fed’s disapproval. It is also worth noting that the 2022-2023 winter has been warmer than usual which creates a favorable condition for spending when compared to seasonal trends. We are still waiting for the weakness in consumption to come through. Yes, Q4 2022 saw pretty minimal increases in PCE, but there have yet to be any signals that it will fall to a recessionary level. The boom in January sales puts Q1 on the right path to avoiding a quarterly GDP contraction once again.
Still to come…
9:15 am (EST) - US Industrial Production
10:00 am - US Business Inventories
10:00 am - US Housing Market Index
10:00 am - US Atlanta Fed Business Inflation Expectations
10:30 am - US EIA Petroleum Status Report
6:50 pm - Japan Trade
6:50 pm - Japan Machinery Orders
7:30 pm - Australia Employment
8:30 pm - China House Price Index
Morning Reading List
Euro area industrial production fell -1.1% MoM and 1.7% YoY in December: intermediate goods production down -2.8% MoM, consumer durables production down -1.4% MoM, consumer non-durables production down -1.0% MoM, capital goods production down -0.4% MoM, and energy production up 1.3% MoM.
The euro area trade balance improved from -€11.7 bil to -€8.8 bil in Dec. Exports fell -9.8% MoM and imports fell -10.4% MoM. Intra-euro area trade has slowed -11.9% MoM as the economic situation has worsened.
The Empire State Manufacturing Survey Business Conditions index jumped 27.1 pts to -5.8 in January. The New Orders index jumped 23.3 pts to -7.8, and the Shipments index jumped 22.5 pts to 0.1. Prices Paid bounced 12.0 pts to 45.0.
Canadian manufacturing sales fell -1.5% MoM to $71.0 billion in December, the 2nd consecutive monthly decrease. Sales decreased in 14 of 21 industries, led by petroleum and coal product sales (-6.4% MoM) and wood product sales (-7.5% MoM).
US Inflation
US inflation remains sticky, but a slowdown is coming (ING) - US core inflation continues to track above the 0.2% month-on-month prints required to get annual inflation down to the 2% target over time, but at least the annual rate continues to slow. We remain optimistic that inflation can get close to 2% late in 2023, largely through flat to lower prices for shelter and a squeeze on corporate profit margins.
Inflation continues to moderate in January, though details less constructive (TD Bank) - Despite core inflation matching December's month-on-month gain, favorable base effects meant that inflation continued to lose speed on a year-over-year basis. That said, the three-month annualized change rose to 4.6% (previously 4.3%) – ending what had been two consecutive months of declines.
US inflation: no Valentine's Day treats in these data (CIBC) - This report puts an end to the string of good news on the inflation front received at the end of 2022. Some of that good news was wiped away last week when BLS revisions to the seasonal factors raised the monthly changes for the fourth quarter, and today's data remains too hot for the Fed's liking. With Q1 GDP projections moving up after the January payrolls data, odds now tilt to two further quarter-point hikes from the central bank.
I Spy With My CPI (BMO) - U.S. inflation is grinding lower, but the still elevated pace of core price growth will keep the Fed on track to raise rates at least two more times this year.
Slow Progress for Inflation (NAHB) - Consumer prices in January saw the smallest year-over-year gain since October 2021 with a seventh consecutive month of a deceleration. However, this disinflation pace was much slower than expected, partially because new methodology introduces higher weights for shelter and lower weights for food and energy to reflect changes in consumer spending in 2021.
The Consumer Price Index (CPI) Rose 0.5% in January (First Trust Portfolios) - Consumer prices reaccelerated in January, rising 0.5% and matching consensus expectations. Yes, some of the increase came from energy prices, which rose 2.0% in the month. However, stripping this category out and its volatile counterpart – food prices – “core” prices still rose at an elevated 0.4% clip. In the last 12 months, overall prices are up 6.4% while core prices are up 5.6%; both well above the Federal Reserve’s 2.0% inflation target.
US CPI: The dilemma for equity investors (Saxo Bank) - The US January CPI report shows that core inflation across different measures including the US Services core inflation excluding energy actually rose in January remaining stubbornly high around 7% annualised inflation. S&P 500 futures initially reacted positively to the report and what looks like a weird behaviour most likely reflecting clearing of hedges and other derivatives positions before settling on the clearer interpretation that inflation remains high. Investors are facing a dilemma in equities as high inflation will reflect no recession but likely leading to higher interest rates and lower equity valuations.
Bond Yields Rise as Consumer Inflation Creeps Higher (HilltopSecurities) - The U.S. Consumer Price Index (CPI) climbed +0.5% in January, following a revised +0.1% rise in December. January’s increase equaled the median forecast, as well as the biggest monthly gain since June. Shelter costs (+0.7%), which make up roughly a third of the overall index, were the biggest contributor last month, while energy (+2.0%) and food (+0.5%) also made significant contributions to the headline.
Disappointing Details in January CPI Report May Give the Fed Room to Maneuver (PIMCO) - The January 2023 CPI (Consumer Price Index) data disappointed many investors and consumers: U.S. inflation accelerated on a sequential monthly basis, and now appears to be moderating more slowly than previously thought. Indeed, following the annual seasonal factor revisions and basket weights update, three-month annualized core CPI now appears to be running at 4.5% (seasonally adjusted annualized return or SAAR), notably hotter than what previously appeared to be 3.1% SAAR for the three months through December, before the revisions.
UK Inflation
Surprise UK services inflation dip bolsters case for rate hike pause (ING) - Services inflation is the bit of the CPI basket that the Bank of England cares most about right now, and January data saw a surprise dip. While it may not be enough to talk the committee out of a 25bp hike in March, if this trend continues, it probably points to a pause from May.
Euro Area Industrial Production
Eurozone industrial production drops in December (ING) - Eurozone industry ended the year on a weak note as production data showed a decline of 1.1% from November and a 1.7% drop compared to the year before.
NFIB Small Business Optimism
Small Business Optimism Index Improves Slightly At the Start of 2023 (TD Bank) - The NFIB's Small Business Optimism Index increased by 0.5 points to 90.3 in January, slightly above the market consensus forecast. The headline index remained below its 49-year historical average of 98 points.
Monetary Policy
How Much Can the Fed’s Tightening Contract Global Economic Activity? (Liberty Street Economics, NY Fed) - What types of foreign firms are most affected when the Federal Reserve raises its policy rate? Recent empirical research used cross-country firm level data and information on input-output linkages and finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods. The research also finds that financial factors drive differences, with U.S. monetary policy spillovers having a much smaller impact on firms that are less financially constrained.
Can Monetary Policy Tame Rent Inflation? (San Francisco Fed) - Rent inflation has surged since early 2021. Because the cost of housing is an important component of total U.S. consumer spending, high rent inflation has contributed to elevated levels of overall inflation. Evidence suggests that, as monetary policy tightening cools housing markets, it can also reduce rent inflation, although this tends to adjust relatively slowly. A policy tightening equivalent to a 1 percentage point increase in the federal funds rate could reduce rent inflation as much as 3.2 percentage points over 2½ years.
FOMC Communication Spillovers: Is There a “Call-Out” Effect? (Kansas City Fed) - The Federal Open Market Committee (FOMC) has a clear domestic mandate: achieving both stable prices and maximum sustainable employment. However, the FOMC’s actions appear to lead to substantial spillover effects for foreign economies. Announcements from the FOMC can spill over to asset prices in foreign markets by altering market participants’ expectations for global growth or the future decisions of their own central banks. To date, research has treated news in U.S. monetary policy announcements as a global shock that produces uniform spillovers. Whether these spillovers sometimes reflect market-specific information has remained an open question.
Inflation
Is the Green Transition Inflationary? (Liberty Street Economics, NY Fed) - Are policies aimed at fighting climate change inflationary? In a new staff report we use a simple model to argue that this does not have to be the case. The model suggests that climate policies do not force a central bank to tolerate higher inflation but may generate a trade-off between inflation and employment objectives. The presence and size of this trade-off depends on how flexible prices are in the “dirty” and “green” sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies.
Employment
US Labor Market after COVID-19: An Interim Report (Cleveland Fed) - Headline numbers have shown that the US labor market has recovered the jobs lost during the pandemic. Nevertheless, there is significant variation in the recovery across states and counties and across occupations and industries. Using the available data from the monthly Current Population Survey and the Bureau of Labor Statistics’ State and Metro Area Employment, Hours, and Earnings for January 2019 to August 2022, we present the changing patterns in the labor market. We also highlight some possible underlying reasons that are correlated with the varying patterns across groups and space. Finally, we look at the spatial distribution of the employment across states and micro and metropolitan areas. Results are in line with an uneven recovery across areas, while at odds with a narrative based on working arrangements making economic activity more even across space.
Real Estate
Single-Family Permits Declined 2022 (NAHB) - For 2022, the total number of single-family permits issued year-to-date (YTD) nationwide reached 972,180. On a year-over-year (YoY) basis, this is 12.5% below the 2021 level of 1,111,414.
Cryptocurrency
Is There a Bitcoin–Macro Disconnect? (Liberty Street Economics, NY Fed) - Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin.
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