Real Wage Growth & Election Risk

In January, headline CPI jumped and core CPI increased slightly. Specifically, headline CPI was up from 2.3% to 2.5% which beat estimates for 2.4%. Headline inflation was up because of energy. Those who don’t follow this report closely will be surprised by this because oil prices cratered in January due to the effect the coronavirus had on Chinese demand. Energy inflation rose sharply because of its easy comp. Energy inflation increased from 3.4% to 6.2%. Its comp went from -0.3% to -4.8%. Therefore, its 2-year stack actually fell from 3.1% to 1.4%. Energy inflation has another easy comp in February as it is -5%. In the spring, the comp gets harder, but then in the late summer and fall, it gets easy again.

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Source: Oxford Economics

Because real wage growth is deflated by headline inflation, this increase in CPI will suppress it. This decline in real wage growth didn’t hurt consumer sentiment in January as it was near the cycle high. Confidence didn’t wane due to higher energy prices because they actually fell sequentially. They were only strong on a yearly basis. The 2-year growth stack in headline CPI fell because its comp was 44 basis points easier and it only rose 19 basis points to 2.48%.

Yearly core inflation rose slightly but stayed at 2.3% which beat estimates for 2.2%. Specifically, it rose 2 basis points to 2.27%, but the comp was 6 basis points easier. Core CPI is above the Fed’s 2% target, but the all-important core PCE inflation isn’t. Based on the CPI report, Oxford Economics expects headline PCE inflation to increase 0.2% to 1.8% and core PCE inflation to rise 0.1% to 1.7%. Goldman expects core PCE to rise to 1.75% from 1.6%. Core PCE inflation will stay below the Fed’s target which is why it is biased towards cutting rates.

Medical Care Services Inflation Stays At Cycle High

Energy commodities inflation was 12.1%: fuel oil inflation was 6.5% and gas inflation was 12.8%. Food inflation 1.8% stayed at. As usual, food away from home had higher inflation than food at home because the labor market is tight and food away from home is labor intensive. Specifically, food at home inflation stayed at 0.7% and food away from home inflation stayed at 3.1%.

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