Inflation Rises, Other Indicators Still Positive

Last Thursday, the Labor Department announced that the Producer Price Index (PPI) rose by just 0.1% in January, but the core PPI, excluding food and energy, rose 0.4% (a 4.9% annual rate). A 2% increase in gasoline prices was offset by a 2.7% decline in natural gas prices and a 0.3% decline in food prices. Over the past 12 months, the PPI is up 4.1%, while the core PPI has risen 3% — well above the Fed’s 2% target.

On Friday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.2% in January. The core CPI also rose 0.2%. In the past year, the CPI has risen 2.9%, while the core CPI has risen 2.3%.

On Wednesday, before these inflation numbers came out, the latest minutes of the FOMC were released, revealing a divided Fed. The notes said that “a few members” favored another round of quantitative easing, while “a number of participants” indicated that a third round of quantitative easing could become necessary “if the economic outlook deteriorated” or if inflation “remains below 2% for an extended period.”

With inflation rates now at 3%, the Fed will be watching GDP numbers closely. Many Fed watchers now expect to see another round of quantitative easing in the fall (before the November presidential election) if economic growth slows — as the Fed has forecasted.

Other economic news from last week looks more positive. On Friday, the Conference Board announced that its index of leading economic indicators (LEI) rose 0.4% in January, led by the interest rate spread and a rise in manufacturing hours. Out of the 10 LEI components, 7 rose. The negative LEI components were expectations for business conditions, initial jobless claims, and manufacturing orders (excluding aircraft).

On Tuesday, the Commerce Department announced that retail sales rose 0.4% in January, well below the economists’ consensus estimate of a 1% increase. The primary reason for this miss was that vehicle sales fell 1.1% in January. Excluding vehicle sales, retail sales rose 0.7% (an 8.7% annual rate), the highest pace in 10 months. Retail sales rose at a 6.3% annual pace over the last three months and 5.8% over the past 12 months, so it appears that consumer spending remains strong and will continue to boost GDP.

The other significant news released Tuesday was that industrial production was unchanged in January, but December’s industrial production was revised up to a 1% gain from 0.4%, so this was considered a positive report. Unusually warm weather continues to suppress utility output, which declined 2.5% in January and negatively impacted the overall industrial production number. The good news is that in the past 12 months, industrial production has risen by a very healthy 3.4% despite the drop in utility output.

Last week’s best economic news happened on Thursday, when the Labor Department announced that new weekly jobless claims declined by 13,000, to 348,000, the lowest level in almost four years. The four-week average of jobless claims declined by 1,750, to 365,250, also near a four-year low. The Labor Department also announced that continuing claims for unemployment decreased by 100,000, to 3.43 million through Feb. 4, so it appears the job market continues to slowly but steadily improve.

We also learned that January foreclosure filings were down 19% compared to a year ago, but they rose 3% versus December. The three states with the highest number of foreclosures are Arizona, California, and Nevada. Since my home office is in Reno, I can see all the empty new homes for sale. In fact, Reno’s inventory of homes for sale is so high that it would take 18 years to work down the inventory at today’s rate of sales. Clearly, the housing market is a major drag in selected states and on the banking industry.

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