Raising the Stakes

Retail sales figures for December showed a relatively strong trend in 4Q17, although part of that reflects a rebound from hurricane effects in 3Q17. Core CPI inflation was a bit higher than anticipated in December, but that doesn’t mean that the low inflation trend is over. However, eighteen states raised their minimum wages in January, and some expect this to flow through to higher prices. Perhaps. The market odds of a March rate hike by the Fed are rising (over 80% on Friday), but stock market investors are not too concerned. If the Fed is raising rates because the economy is strengthening, well, that’s a good thing. But what if that’s a mistake?

Retail sales exhibited a weakening trend through the first eight months of 2017 – not a sharp drop, more of a gentle slowing. Results for the final four months of the year were much stronger. This raises a number of possibilities. Consumer spending growth is often uneven across months and quarters. So, the 2017 pattern could simply be the normal variation around a moderate trend. We know that no matter their personal financial situation, consumers will spend during the holiday season. On the other hand, the consumer could be really picking up steam at this point, reflecting increased confidence about their ability to find jobs. Job growth, while expected to slow somewhat, has been supportive, but inflation-adjusted growth in average wages has been lackluster.

Scott Brown
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