The high January CPI (+0.5% m/m Total, +0.3% Core) was the risk, with the culprits pretty much in line with those pointed out in my prior blog. It means that the stock and bond markets still need to "work" against fiscal stimulus. Although Retail Sales were soft, they tend to flatten out for a couple of months after a period of strong months. So, their trend is not necessarily weak. But, the Atlanta Fed model is likely to lower its forecast of Q118 Real GDP Growth from 4.0% (The update is due later today).
It is not easy to dismiss the jump in the CPI to one-off spikes. While there were a couple of temporary jumps in components with good-sized weights in the Core CPI, other components fell for reasons that could be attributed to volatility. The large, underlying component -- Owners' Equivalent Rent -- stayed high.
The 1.7% m/m in Apparel prices is an outlier, and to a large extent probably just an end to holiday-related discounting in November-December. But, another good-sized increase in this category is likely in February. Not only is there bi-monthly sampling by the Bureau of Labor Statistics, which spreads out large price shifts over two months, but there is the possibility that the introduction of higher-priced Spring clothing will show up. The January jump looks like it added 0.1% to the Core CPI.
Medical Care Services also were strong, up 0.6% m/m, which added 0.05% pt to the Core CPI. The jump looks like a start-of-year hike, which won't be repeated.
Apparel and Medical Care Services prices are not the only components with an unusual price movement in January. But, other components showed declines. These include new motor vehicles, which dipped after a big increase in December, hotel prices, medical commodities, and airfares. They should move back up ahead.
Importantly, the largest component -- Owners' Equivalent Rent -- remained high at 0.3% m/m. So, the Fed's outlook for a gradual increase in inflation to 2.0% remains intact.
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