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.
A hot inflation report for January might be a surprise to some investors, but it really shouldn’t be. The M2 measure of the money supply surged more than 40% in the two years ending in February 2022 and part of that surge is still generating extra inflation.
Analysts have been touting a 1.8% annualized rate of increase in consumer prices during the last three months of 2022, but these numbers were revised, now showing that the CPI climbed at a 3.3% annual rate in the fourth quarter. “Core” inflation, which excludes volatile food and energy prices, were previously reported as up at a relatively moderate 3.1% rate in the last three months of the year; now that’s been revised up to a 4.3% pace.
In other words, the recent trend in inflation hasn’t been as soft as some have been saying. And now, the consensus (and First Trust) expects a 0.5% increase in January. Some of this is energy, but “core” should also increase at a faster pace than many expected last year.
Retail sales should also be strong in January, for multiple reasons. First, January was unusually warm, which made it easier for consumers to be out and about. Second, auto sales were very high because of a temporary spike in fleet sales to rental companies, which are counted in retail sales. Third, cost-of-living adjustments for Social Security happen in January and were very large this year because of high inflation in 2021-22. And last, massive government payments during COVID look like they’ve messed up the normal Christmas seasonal pattern in retail spending, with relatively less spending in December, in turn making January look better by comparison.