Ok December Retail Sales: 2.2% Q4 GDP Growth Incoming

Weak PPI Report Signals No Rate Cuts

Just like headline CPI, headline PPI was up because of energy prices. It increased from 1.1% to 1.3% which met estimates. Commodities inflation has been low in the past few years as most inflation has been coming from wages. PPI excluding energy and food fell from 1.3% to 1.1% which missed estimates for 1.4%. That was the lowest core PPI since August 2016. Finally, core PPI excluding trade services was up from 1.3% to 1.5%. Trade services weighted on inflation.

I look at PPI to project the other inflation reports. Sometimes PPI comes out before CPI and sometimes it’s the reverse, but they always both come out before PCE. We can use the inputs from the PPI and CPI reports to predict PCE inflation. This explains why PCE inflation rarely beats or misses estimates by a large margin. That’s the same reason consumption data doesn’t come in wildly away from estimates as we already have the retail sales report.

As you can see from the chart below, based on PPI and CPI inputs, December core PCE inflation will fall to 1.56%. That core PCE inflation is nowhere near enough to cause the Fed to hike rates. If anything, low inflation will cause the Fed to raise them. Core PCE inflation hasn’t been above 2% for most of this cycle. The Fed’s goal is to have sustained inflation at 2% which it has failed at achieving. This environment with low inflation and low unemployment has worked out for consumers this cycle. If it wasn’t for wage inflation, it would be perfect for firms. We saw margins contract especially at small firms in 2019 even though PPI was low.

(Click on image to enlarge)

Beige Book Report

The latest Fed Beige Book report measured economic data in the final 6 weeks of 2019. In other words, the holiday shopping season. The Beige Book showed that businesses are worried about the trade war with China. The good news is Phase 1 of the trade deal is complete, but the bad news is Fed members stated firms’ concerns won’t be gone until Phase 2 is complete.

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