U.S. Retail Sales Jump as Inflation Surges Consumers spent broadly at the start of the year, with higher prices eroding some spending power but demand strong

Retail sales, a measure of spending at stores, online and in restaurants, rose by a seasonally adjusted 3.8% in January from the prior month, the Commerce Department said Wednesday. (…)

Spending gains were broad-based last month, with purchases of vehicles, furniture and building materials all increasing. Online sales also rose sharply. Restaurant and bar receipts dropped last month as consumers limited in-person services during the latest Covid outbreak. (…)

Diane Swonk, chief economist at Grant Thornton, said the retail-sales figures showed “strength is coming through” as supply-chain disruptions ease. “The bottom line is all the stars are in alignment for a more aggressive liftoff” by the Fed, she added. (…)

Accelerating inflation can blur the true trends in demand as this chart shows:

Actually, real retail sales above are inferred by the St-Louis Fed deflating nominal sales by the headline CPI. This rough approximation becomes very rough when goods inflation substantially exceeds inflation on services which account for but a very small part of retail sales.

In January 2021, both inflation series were up by the same 1.4% YoY. Last month, however, total CPI (blue) was up 7.5% YoY while CPI-Services (red) was up 4.5%, meaning that goods inflation was running close to 12.0% YoY.

As support evidence, January’s CPI-Nondurables was up 9.8% and CPI-Durables was up 18.4%.

Here’s my own very approximate rendition of real retail sales (blue) deflating nominal sales (red) with CPI-Nondurables (66%) and CPI-Durables (34%). It probably overestimates the inflation factor given the very different energy component in both series but it illustrates how recent high goods inflation has artificially inflated retail sales data.

This next chart plots the BEA’s data on real expenditures on goods through December (January is out Feb. 25). Real expenditures on goods peaked in March 2021 with the last stimmies and broke down hard after Thanksgiving. They remain about 3.5% above trend, however.

The Chase card spending tracker points to somewhat weaker February control sales through February 11.

Americans Want to Travel and Are Eager to Splurge, Companies Say More consumers are hitting theme parks, dining out and booking hotel rooms. ‘There is a lot of pent-up demand for baseball’

(…) Companies including Marriott International Inc., MAR 1.14% Expedia Group Inc., EXPE 0.88% Coca-Cola Co. and MGM Resorts International MGM 0.20% told analysts recently that business is already improving from an Omicron dip and indications point to an American public eager to live large. (…)

As more Americans travel, Marriott is seeing greater demand for its high-end properties, CEO Anthony Capuano said on a conference call with analysts Tuesday. (…)

At Walt Disney Co. ’s theme parks, business came roaring back in the most recent quarter, with revenue from both domestic and international parks more than doubling year-over-year. Attendance is still short of pre-pandemic levels, but those who are showing up are spending as much as 40% more per capita than in 2019, Chief Financial Officer Christine McCarthy said last week. (…)

Companies reported that people are eating out at restaurants as restrictions are removed and daily cases fall. PepsiCo Inc. CEO Ramon Laguarta said that while at-home consumption has remained high, business at restaurants is accelerating.

Coca-Cola’s volume of sales at its away-from-home business surpassed 2019 levels in the latest quarter for the first time since the pandemic started, the company said last week. (…)

This data, courtesy of CalculatedRisk, is through February 5th. The occupancy rate was down 15.8% compared to the same week in 2019.

Walmart Bucks Supply-Chain Snarls With Upbeat Annual Outlook

Comparable sales at U.S. Walmart stores will post a percentage gain “slightly above 3%” excluding fuel during the current fiscal year, which ends in early 2023, the retailer said in a statement Thursday as it reported earnings. (…)

Last quarter, comparable sales at Walmart’s U.S. stores rose 5.6% (…)

Walmart’s U.S. e-commerce sales, a closely watched metric, rose 1% in the fourth quarter while analysts were looking for a 2.2% gain. (…)

Upbeat? What am I missing? And these are nominal sales, at Walmart!

A significant percentage of Walmart sales are imported goods. Inflation on imported goods (+6.9% YoY0 is far from slowing as this Haver Analytics table shows. America’s trading partners are also suffering from U.S. inflation.

Yesterday we also got December inventories data, also not inflation adjusted. Wholesale and manufacturing inventories are back to trends but retailers are still struggling with low inventory, although undocked goods are not included in the data…

U.S. Home Builder Index Eases in February The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell to 82 in February after an unrevised weakening to 83 in January.

  

Surveys, surveys

Business Leaders Survey Covering service firms in New York, northern New Jersey, and southwestern Connecticut

Business Inflation Expectations Increase to 3.6 Percent

• Productivity is not seen as a more important offset than in the last 10 years:

• Long-term inflation expectations remain subdued considering recent inflation. Business people are not different than consumers and investors in that regard. The Fed will surely appreciate:

But Ray Dalio offers a good explanation for the apparent general complacency towards longer-term inflation:

Where We Are in the Big Cycle of Money, Credit, Debt, and Economic Activity and the Changing Value of Money

(…) History has repeatedly shown that people tend to have a strong bias to believe that the future will look like a modestly modified version of the past even when the evidence and common sense point toward big changes. I believe that’s what’s going on and that we are in the part of the cycle when most people’s psychology and actions are shifting from deeply imbued disinflationary ones to inflationary ones.

For example, people are just beginning to transition from measuring how rich they are by how much “nominal” (i.e., not inflation-adjusted) money and wealth they have to realizing that how rich they are should be measured in “real” (i.e., inflation-adjusted) money and wealth. From studying history, and with a bit of common sense, we know that when people shift their perceptions in that way, they change their investment and non-investment behaviors in ways that produce more inflation and that make central banks’ difficulties in balancing inflation and growth harder.

For example, people realize that cash is a trashy investment rather than a safe one, that virtually all debt assets (i.e., bonds) are bad, that inventories and forward coverage should be built up to protect against inflation, and that cost-of-living adjustments should be built into contracts to protect against inflation—all of which make upward inflation pressure more intense.

Think of bond investors. Prices rose for over 40 years and yields declined to lousy levels (in both nominal and real terms), and they accepted them. Now they still have those lousy yields (though slightly better than when they were at the absolute lows) plus they are now experiencing price losses. After that huge 40+ year bull market in bonds, imagine how many investors are complacently long and beginning to get stung, and imagine how their behaviors could change to become sellers of bonds, and imagine the effects that would have. (…)

Fed Eyeing Potential for Faster Rate Rises to Ease Inflation Officials at the central bank also stepped up deliberations last month over how to shrink the Federal Reserve’s $9 trillion asset portfolio, according to the minutes from the January meeting.

(…) When the Fed raised interest rates between 2015 and 2018, it did so gradually—and never more than once every quarter. Under the economic outlook they judged most likely last month, most officials last month “suggested that a faster pace of increases…than in the post-2015 period would likely be warranted,” the minutes said.

The discussion indicated officials were prepared to raise interest rates at consecutive policy meetings, which occur roughly every six weeks, something they haven’t done since 2006. That could set up a series of rate increases in March, May and June. (…)

The discussions still have weeks to play out before the Fed’s next policy meeting, March 15-16. But they could lead some officials to support starting with a larger half-percentage-point increase rather than the standard quarter-percentage-point move. The Fed hasn’t raised rates by a half percentage point since 2000. (…)

Officials must balance whether larger, upfront rate increases would give them greater flexibility to slow rate increases later this year if inflation declines against the potential risks of fueling market expectations for even bigger and potentially more disruptive moves. (…)

On Wednesday, interest rate futures markets projected a nearly 80% chance that the Fed would lift interest rates to a range between 1.75% and 2% this year, according to CME Group, which would be equivalent to raising rates by a quarter percentage point at all of its scheduled policy meetings this year. (…)

The Fed’s staff last month projected that inflation, using the central bank’s preferred gauge, would slow to 2.6% this year, down from 5.8% in December, the minutes said. The forecast projected inflation to decline further to 2% next year. At officials meeting in December, the staff had projected inflation to decline to 2.1% this year.

Bank of Canada may need to be ‘forceful’ in face of high inflation, deputy governor says In a speech on Wednesday, Timothy Lane set the stage for a rapid rise in interest rates

(…) In a rare moment of indiscretion for a central banker, Mr. Lane appeared to suggest the bank had already decided to increase rates on March 2, its next policy announcement date – underscoring what most economists already consider inevitable.

In response to a question about the massive number of government bonds the bank accumulated in the first year and a half of the pandemic, he said the governing council would think about reducing these holdings after the first rate hike.

“Quite likely, we’ll be saying something about that in a couple of weeks time when we’re actually at the stage of changing our … uhh, when we’re actually at our next decision point,” Mr. Lane said. (…)

Mr. Lane said the central bank expects inflation to decline quickly in the second half of the year, but he added the policy makers are “alert to the risk” that high inflation could prove more persistent.

“We will be nimble – and if necessary, forceful – in using our monetary policy tools to address whatever situation arises,” Mr. Lane said in the virtual address. (…)

Canada’s annual inflation rate rises to 5.1% in January on broad price increases

The consumer price index rose 5.1 per cent in January from a year earlier, accelerating from December’s pace of 4.8 per cent and marking the first time since 1991 that inflation has surpassed 5 per cent, Statistics Canada said Wednesday. It was the 10th consecutive month that inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent. (…)

Housing costs rose 6.2 per cent in January, the fastest annual pace since 1990. The homeowners’ replacement cost index – which is tied to the price of new homes – rose 13.5 per cent, propelled by higher prices for lumber and other building materials.

Grocery prices rose 6.5 per cent in January on an annual basis, quickening from December’s 5.7-per-cent pace. (…)

The average of the Bank of Canada’s core measures of annual inflation – which strip out extreme price swings and give a better sense of underlying trends – rose to 3.2 per cent from 3 per cent, the highest since 1991.

Once again, inflation was higher for goods (7.2 per cent) than services (3.4 per cent), a reflection of pandemic shifts in consumer spending. (…)