us dec 2017 cpi and retail sales - reaction
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12 January 2018


  • US Dec CPI 0.1pct m/m est 0.1pct
  • CPI 2.1pct y/y est 2.1pct
  • CPI Ex Food & Energy 0.3pct m/m est 0.2pct
  • CPI Ex Food & Energy 1.8pct y/y est 1.7pct
  • US Dec Retail Sales Advance 0.4pct m/m est 0.5pct
  • Retail Sales Ex-Auto 0.4pt est 0.3pct
  • Retail Sales Ex-Auto & Gas 0.4pct est 0.4pct
  • Retail Sales Control Group 0.3pct est 0.4pct
  • Real Dec Avg Weekly Earnings 0.7pct y/y prev 0.8pct
  • Real Avg Hourly Earnings 0.4pct prev 0.2pct


U.S. headline consumer prices inched up by a tamer clip again in December thanks to slower energy cost growth, but core inflation which strips out food and fuel jumped by its highest proportions since January 2017, data on Friday showed.


Meanwhile, retail sales in December offered a mixed bag versus forecasts.


U.S. Consumer Price Index (CPI), the key U.S. inflation gauge, stood at 0.1pct m/m in December, in line with market forecasts. Following 0.4pct rise in November, this represented the sixth successive monthly increase in a row.


December slowdown in consumer prices was caused mainly by a drop in energy costs that was offset by an increase in prices of shelter.


Energy prices dropped 1.2pct in December, following November's 3.9pct spike, while costs of accommodation rose 0.4pct after 0.2pct gain in November and accounted for almost 80pct of the overall CPI print.


U.S. consumer prices have risen on a monthly basis every month since July after several ups and downs in the first half of 2017.


But the picture was very different where the core CPI, which excludes volatile food and energy prices, is concerned. That grew 0.3pct in December, more than the expected 0.2pct, to make it the largest monthly increase since January 2017. November’s core measure stood at 0.1pct.


The core CPI will fuel the Federal Reserve’s resolve that in 2017 the US economy had experienced “transitory” effects clamping down price inflation. Federal funds futures imply traders see a 84pct chance the FOMC will raise interest rates vt 25 bps on March 21, up from 76pct prior to the US CPI data.


“The “transitory” softness in the core is over,” Ian Shepherdson, chief economist at Pantheon.


“The December CPI rose 0.1pct, in line with the consensus. But the core rose 0.3%, above the consensus, 0.2%, and the biggest increase since January last year,” Shepherdson said.


But what is more, the even the slowdown in energy prices may be coming to an end, exposing upside risk for headline prices.


“A 2.7pct fall in gas prices, which will soon reverse, held down the headline. apparel prices and airline fares fell again - albeit by less than in Nov - so we see scope for another robust core increase in Jan, when used car prices are likely to rise again. For now, this report adds more weight to the idea that the run of soft numbers from March through July was "transitory", Shepherdson said.


In a note Pantheon portrayed the currents in core inflation. A chart reveals the monthly core numbers have recovered from their spring/summer weakness. The y/y rate is still subdued but will begin to rise rapidly in March, on the anniversary of the first unexpectedly weak m/m reading.

Source: Pantheon Macroeconomics
Source: Pantheon Macroeconomics

The annual core figure inched up to 1.8pct pace in December, above the 1.7pct level expected by analysts. The core year-over-year measure also fell sharply at the beginning of last year and has stayed at or just slightly above 1.7pct since May.


Year-on-year headline inflation rose 2.1pct last month, in line with an analysts' forecast and followed November’s 2.2pct gain. After a steep one percentage point drop during the first half of 2017, the annual inflation figure got back on track and has been hovering at or above 2.0pct – the Fed’s price stability target - since September.


In a separate report released at the same time, the Federal data revealed U.S. retail stores, restaurants and online shopping platforms saw a 0.4pct increase in sales in December - the fourth monthly gain in a row. That was slightly less than the 0.5pct expected by economists. November's increase in retail sales was revised up a bit to 0.9pct.


However, economists still saw past the mixed monthly data to label the December retail numbers solid and boosted by hefty upwards revisions to the back month.


December's seasonally-adjusted retail sales were 5.4pct above December 2016, with total sales in the holiday period between October-December 2017 up 5.5pct from the same period a year ago. Stripping out autos, gasoline and building materials, and retail sales were 5.2pct higher on a seasonally-adjusted basis between November-December from the same two-month period in 2016. Sal Guatieri, chief economist at BMO Capital Markets, said the rise marked the best holiday season for retailers since 2014 and the second best since 2006. 


When stripped of volatile autos, retail sales rose month on month as well, up 0.4pct, slightly more than the expected 0.3pct climb, posting the sixth consecutive monthly increase. The ex-auto measure jumped 1.3pct in November. The core indicator had increased every month over the course of 2017 with the exception of slight drops in May and June.


The December increase in overall retail sales headline number was driven by gains in most of the large categories, such as autos, furniture, building material, food and beverage, general merchandise stores and non-store retailers, which offset declines in sales of electronics, clothing, sporting goods and miscellaneous store retailers.


Car dealers saw 0.2pct increase in sales last month, following November's drop. Sales of gasoline stayed unchanged in December after a 3pct spike a month earlier.


“Given the unreliabilty of the first estimates of monthly retail sales, overall this report is as expected. But the hefty 0.4pct net upward revision to non-auto sales for Oct/Nov means that the data will trigger upward revisions to estimates of Q4 consumption, which already looked set to rise by about 3-1/2pct,” said Pantheon’s Shepherdson. 


By 1340 GMT, the dollar index was at 91.33, down 0.57pct on the day, versus 91.28 before the data was released. Cable was at USD1.3613, up 0.56pct on the day, versus USD1.3636 earlier. It marked some firming against sterling after earlier on Friday marking its weakest levels since 20 September.


The interest rate-sensitive two-year US Treasury yielded 2.018pct, up 4.5bps on the day, versus 1.989pct earlier while the 10-year T-Note yielded 2.588pct, up 5.7bps on the day and compared with 2.55pct earlier.


The S&P 500 index future was at 2,767, up 0.7pct on the previous close, versus 2,773 before the data.


“Inflationary pressure remains stubbornly below the Fed’s target of 2pct. Coupled with softer retail sales, the US Dollar remains at its lowest level of 2018. However, the fact inflation did tick higher than economists expected is likely to cause the greenback to make some gains against the Euro and the Pound,” said Miles Eakers, Chief Market Analyst at Centtrip.


Zuzana Jerabek – LiveSquawk News

Additional reporting George Matlock


Related reading

US Dec 2017 CPI and Retail Sales – Preview

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