Today’s CPI and retail sales reports were noteworthy, particularly the latter. First the numbers: The core CPI increased 0.3% in December, the strongest monthly gain since January 2017, and the 12-month rate edged up a tenth to 1.8%. Retail sales advanced 0.4% in December, close to the consensus, but the story here was the upward revision to the November data. The retail control group, which includes only those categories of retail sales that are direct inputs into the PCE data, advanced 1.4% in November, revised up from an already
strong 0.8% increase.
This retail sales report strengthens the sense of building momentum heading into 2018. We are just beginning our next forecast round, and the stronger retail sales will raise estimated Q4 GDP growth a couple of tenths. It now looks likely that Q4 will be the third consecutive quarter with growth of at least 3%. On the other hand, while the November CPI report was promising, we should be cautious in our assessment of the underlying trend. To be sure, that trend is higher than the recent low of 1.3% and edging closer to the cyclical high of 1.9%. While it appears likely that 12-month core PCE inflation will remain a modest 1.5% in December, we also pay attention to shorter-horizon inflation rates because of the decline in core PCE prices in March 2017. Core PCE prices have advanced at an annualized rate of 1.6%, on average, since that decline. And monthly core inflation readings have been somewhat firmer, on average, over the last several months–about 1.8% annualized beginning in September.
Still, there is good reason to be cautious about concluding that inflation is back, specifically that the underlying rate is moving back to its cyclical high from its cyclical low. As Williams has said–unlike most of his colleagues—he is not surprised or concerned by the period of softcore inflation. It can come in waves, above expectations for several months—as late last year and early this year—then below—as from March through August. So, he’s not too excited about the sharp slowing in 12-month core inflation, and not too excited about the higher monthly readings since August. A reasonable guess maybe that the underlying rate is about 1.7%, consistent with the Dallas Fed’s 12-month trimmed mean measure in November. So it may be too soon to conclude that the incoming data is validating the median core PCE inflation projection of 1.9% for 2018, but the firmer readings since September give more hope.