The Trillion-Dollar Question: Is Inflation Brewing?

This week, the latest news from the Fed shifted everyone’s attention back to the U.S. economy, particularly whether inflationary pressures are brewing. After several rounds of Quantitative Easing, some in the Fed are wondering about the long-term costs of its “easy money” policy.

The fact that inflation has been moderate for so long has encouraged the Fed to do whatever it can to prop up the jobs market…until now.

With some hawks in the Federal Open Market Committee wondering whether to tap the brakes on the $85 billion it spends each month to buy back Treasurys, let’s revisit the latest economic data to see where inflation actually stands—both at the consumer and the wholesale level. I’ll then cover the other pockets of the economy that we received data on this week.


In January, the Producer Price Index climbed 0.2%. Economists had expected wholesale prices to rise at twice that rate—0.4%. Interestingly enough, food prices jumped 0.7% thanks to a big freeze that affected vegetable growers on the West Coast. But a 0.4% drop in energy prices balanced out the headline figure. Core PPI, a more reliable measure of wholesale prices because it excludes food and energy, also rose 0.2%. Over the past year, the core PPI has risen just 1.8%—the lowest annual pace in 11 months. And even though gasoline prices are rising at the pump, wholesale fuel prices remain tame. So barring any more crop freezes, I don’t expect the PPI to move much over the next few months.

The Consumer Price Index remained unchanged in January. This is the second month in a row that CPI has stayed flat; economists had forecast a 0.1% rise in the CPI. In January, a 3% drop in fuel prices and flat food prices kept overall inflation down. However, excluding these more volatile components, core CPI rose 0.3%, above the 0.2% consensus estimate. We saw a 0.8% jump in clothing costs as well as higher hotel and airfare prices. While the headline figure was flat, I expect that to change for the next CPI report, now that gas prices are back on rise. And we can’t ignore the fact that the core CPI jumped the most in over a year. So some inflationary pressures are starting to brew and I expect an upward revision to this data in the February report.

The Jobs Market

Last week, jobless claims rose by 20,000 to an annual rate of 362,000. This was a little less than the 365,000 rate forecast by economists. Meanwhile, the four-week moving average ticked up by 8,000 to 360,750. Despite a bit of volatility we saw in January, jobless claims appear to be holding steady. In the past three months, the four-week moving average has fallen 7.5%. And it was just a few weeks ago that the moving average fell to a five-year low, so it seems that layoffs are moderating downward.

The Housing Market

Housing starts fell 8.5% in January to an annual rate of 890,000. This was below economists’ expectations for a 900,000 annual rate. Breaking it down, housing starts fell 24.1% for apartments but they rose 0.8% for single-family homes. The good news is that this pace is still the third highest since 2008.

Meanwhile, new permits climbed 1.8% to a 925,000 annual rate. This is the highest total since mid-2008 and topped economists’ forecast for a 915,000 rate. Permits for single-family homes rose 1.9% while permits for multi-family units gained 1.5%. To keep things in perspective, 2012 saw the most homes built in four years. So while economists expected stronger housing starts, we’re still seeing a significant recovery. I’d also like to add that building permits tend to be an indication of future housing starts, so I’m convinced that they will steady in the coming months.

In January, sales of existing homes advanced 0.4% to an annual pace of 4.92 million. This came below the consensus estimate of 4.95 million. However, the report also revealed that over the past year the supply of existing homes has plunged 25% to 1.74 million. Amounting to a 4.2 month supply, this is the lowest level in over a decade! While this seems like a modest gain at first, this is great news for the housing market. Between the tight inventory and low mortgage rates, the housing market should steadily improve in 2013.

The Big Picture

The index of Leading Economic Indicators rose 0.2% in January. This is the second month in a row that the index has risen, following the 0.5% gain we saw in December. However, it just missed economists’ consensus estimate of a 0.3% gain. Six of the 10 LEI components lifted the index, most notably stock prices and stronger property values. Meanwhile, consumer expectations, manufacturing hours and orders all fell. It’s encouraging that the index has risen despite concerns about the U.S. budget. In fact, over the past six months the LEI has advanced 1.1%. The housing recovery has played a large part in this and the expectation is that it will continue to prop up the economy.

Looking Ahead

Next week is going to be a big one when it comes to economic news. Just take a look at all of the reports coming our way:

  • On Tuesday, we’ll receive New Home Sales data for January and the Conference Board’s February Consumer Confidence report.
  • On Wednesday, the Commerce Department will release its Durable Goods Orders report for January.
  • On Thursday, we’ll get the latest Jobless Claims figures as usual, but then the Commerce Department will announce Fourth-Quarter Gross Domestic Product, the broadest measure of economic activity.
  • On Friday we’ll see Personal Income statistics for January and the University of Michigan will reveal its Consumer Sentiment Index results for February.

There will be plenty of ground to cover next week, so be sure to bookmark this blog so you can stay caught up on the latest market-moving headlines.


Louis Navellier

Louis Navellier

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