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October 14, 2005
Inflation and consumer confidence...not good news
From the BLS:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent in September, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The September level of 198.8 (1982-84=100) was 4.7 percent higher than in September 2004.
Further down in the report we find that the SAAR of CPI-U inflation for the first 9 months of 2005 is 5.1%. These are some of the highest inflation readings in about 15 years.
And the NY Times chimes in...
The inflation figures were the first, and perhaps most closely followed, slate of economic reports released today that showed retail sales rising at a moderate pace after sliding in August, consumer confidence dropping for the third month in a row, and industrial production declining as the two hurricanes and a strike at Boeing idled assembly lines, oil rigs, chemical plants and refineries.
The Commerce Department reported that retail sales increased by 0.2 percent in September, slower than the 0.5 percent gain may economists had expected. Sales had fallen by 2.1 percent in August, as big discounts by Detroit's big three automakers wound down.
Retail sales in September were also depressed by the end of heavy discounting by the domestic automakers; excluding cars, sales rose 1.1 percent. But last month's sales figures were also skewed by a sharp increase in the dollar value of gasoline purchases as prices at the pump soared past $3 a gallon in many parts of the country. Excluding both cars and gasoline, retail sales rose by 0.6 percent last month.
Reuters reports on the consumer confidence numbers...
NEW YORK (Reuters) - U.S. consumer sentiment fell unexpectedly in early October to its lowest level in 13 years, as high gasoline prices and the fallout from hurricane damage continued to take their toll, a report showed on Friday.
The University of Michigan's preliminary October index of consumer sentiment fell to 75.4, according to sources who saw the subscription-only report. That was below a final September reading of 76.9 and much below Wall Street's median forecast of an increase to 80.0.
"We were anticipating that we could see a little bit of an improvement in October because the rebuilding after the hurricanes appears to have started and energy prices have stabilized, but it appears that it will take a little longer for consumers to feel better about things," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, Missouri.
The survey's expectations component eased to 62.4 from 63.3, also defying Wall Street forecasts for an increase to 67.0. The early October expectations reading was the lowest since March 1992.
I doubt that rebuilding is making much of an impact yet. Gas prices are coming down in some areas (IN-FORUM article-registration required). If that is to help at all, it might start kicking in next month.
Oh, and in the bond market, the 10 year is down 5/32 pushing the yield to 4.48%.
Once again, the Fed is in a tough spot, but clearly all of the recent talk from Fed officials has been that they are worried about inflation and will pursue a course of action designed to contain inflation. All along the word has been that the policy would be data-dependent. My guess is that the inflation figures will weigh more heavily on their deliberations. The consumer confidence numbers will improve if energy prices stay contained and as the hurricanes fade from memory (or at least fade away from the forefront of national consciousness). I don't think that the Fed would weaken its stance on inflation based on the consumer confidence survey.
Months ago, I would have anticipated a pause in the rate hikes by years end. As inflation has ticked up over those months, I have been revising my priors every now and then. Another data-point and another revision in my probabilities. A pause in the rate hikes by the end of the year seems almost out of the question unless something out of the ordinary happens. Then it will depend on data from the next few months and perhaps on who is selected to replace Chairman Greenspan. As long as inflation is creeping up, the rate hikes will continue, perhaps into March before we get a break.
Not a hard landing yet, but we are experiencing some turbulence. We're leaning hard against the wind, but the wind is picking up. It's an uncomfortable situation, to say the least.
Posted by William Polley at October 14, 2005 11:16 AM
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Comments
It's always surprising to me how long it takes inflation to respond after a monetary shock. It's hard to say how much of the increase in energy prices will bleed through to output prices, but if the Fed believes the lags are as long as for a monetary shock, they may not be much encouraged by the fairly docile core inflation numbers.
Posted by: Mark Thoma at October 14, 2005 2:15 PM
NY Times -- "The Commerce Department reported that retail sales increased by 0.2 percent in September, slower than the 0.5 percent gain may economists had expected."
I believe that you will find that overall retail sales less gasoline retail sales actually declined for the month.
Posted by: Movie Guy at October 16, 2005 11:28 PM