Inflation Is The Main Story Of 2018

Retail Sales Hurt GDP

As it turns out, Q1 2017 had poor GDP growth because of weak consumer spending growth. The poor January retail sales means Q1 2018 might have weak GDP growth. As a result of the retail sales report and the CPI report, the Atlanta Fed GDP Now estimate for real consumer spending growth fell from 3% to 2%. This pushed the GDP growth estimate down from 4% to 3.2%. As I mentioned in the last article, consumer spending growth in Q1 2017 was 1.1%. The Q1 2018 result will be determined by the next 2 months of reports. It’s too early to tell what the final number will be, but based on this retail sales weakness, I think the 3.2% forecast is too high. The ISM reports are usually too bullish. They shouldn’t be taken seriously by the Atlanta Fed forecast model.

Inflation Is Here

CPI increased 0.5% month over month in January. This beat expectations for 0.3% growth. As you can see in the chart below, this is the highest rate since September 2017. The September report catalyzed further hikes by the Fed, so this report will also be important to setting monetary policy. Core inflation was up 0.3% month over month which beat estimates for 0.2%. The headline CPI was 2.1% on an annualized basis which beat expectations for 1.9%. Core CPI was up 1.8% which beat estimates for 1.7%. As you can see, the Fed’s goal of 2% core inflation still hasn’t been met. It’s notable how global growth and a fiscal stimulus did more to boost inflation than the dovish monetary policy this cycle. The worry about runaway inflation is overblown. I’m expecting 2% core inflation to be hit this year, but I’m not worried about inflation getting too high.

Energy prices were a big driver of headline inflation as fuel oil was up 9.5% and gasoline was up 5.7%. On a year over year basis gas was up 8.5% and fuel oil was up 22.5%. One notable issue, which I’ll keep an eye on, is that some are proposing an increase to the gas tax to pay for infrastructure improvements. On the one hand, the economy doesn’t need anymore stimulus. On the other hand, improvements to roads and bridges doesn’t boost the economy like new infrastructure does. The best way to improve growth would be to invest in internet accessibility. Food prices were up 0.2%. Food away from home was up 0.4%, which is its biggest gain in a year. It was up 2.5% annualized. Clothing prices were up 1.2%.