The January effect on prices
Perhaps another factor in play in the January CPI readings is what’s known as the “January effect” for consumer and wholesale prices. Corporations tend to push through price increases at the beginning of the year, which can have an outsized impact on January inflation data. But it may be more of a one-off effect versus a persistent trend in the year ahead. If this is the case, we could continue to see more moderation, particularly in goods pricing, in the coming months.
Will the last mile to 2.0% prove too difficult?
Those who believe inflation may be persistent in the months ahead often point to the strong economy, particularly in the U.S., and resilient consumer as sources of inflationary pressures. It’s true that over the past four quarters, the U.S. economy has grown at an average 3.1% annualized pace, well above trend growth of 1.5% to 2%, driven by strong household consumption.1
Coming out of the COVID-19 pandemic, consumers have clearly shifted their consumption patterns, from buying goods online to buying services and experiences, including travel, leisure, hospitality and dining. This has also shown up in higher services inflation and softer goods inflation in both the CPI and PPI baskets.
But can the U.S. consumer continue to spend at a robust pace? There may be some early indications that consumers may be slowing down a bit. This past week, the monthly U.S. retail sales figure for January came in well below expectations, with retail sales falling 0.8% month over month.1 This was more than the expected 0.15% decline and below December’s 0.4% gain.1 This is a trend worth watching, as monthly retail sales figures can be volatile. They also tend to track goods consumption versus services consumption, which we know has been lagging.
While there aren’t many notable cracks in consumption, we may see some cooling in the labor market in both the U.S. and Canada going forward. This could put downward pressure on wage gains and services inflation broadly. The Fed’s own estimates show the U.S. unemployment rate rising to 4.1% from its current 3.7%, and we have seen leading indicators in the U.S. and Canada such as job openings move lower.2 While we wouldn’t expect a deep or prolonged labor market slump, increased supply and lower demand for workers may spur some easing in wage gains and softer consumption, which can support the last mile lower in inflation.