Accelerating core inflation paired with a declining industrial sector and stagnant wages will make life difficult for the Federal Reserve today as the FOMC tries to maneuver between rising prices, an economy that is mired in slow growth and wages that offer little prospect for a consumer led economic recovery.
Consumer prices excluding energy and food rose 0.3 percent in February, matching the highest monthly gain since the recession and the first back to back increases of that size since early 2001, reported the Labor Department on Wednesday in Washington. A rise of 0.2 percent had been forecast by economists. Annual core inflation jumped to 2.3 percent in February from 2.2 percent the previous month, also equaling the highest rate since the-financial crisis.
Overall consumer inflation dropped 0.2 percent in February, as expected, driven primarily by declining energy costs. The twelve month rate slipped to 1.0 percent from 1.4 percent. It was a the first drop in annual consumer prices in six months. The 0.1 percent gain for all of 2015 was the lowest non-recessionary annual inflation rate since the Depression.
The Federal Reserve has repeatedly stated that inflation should return to its 2 percent target 'in the medium term' as a condition for continuing to 'normalize' interest rates.
The Fed instituted its first hike in almost a decade in December. At that meeting the bank’s own projections envisioned four 0.25 percent increases in 2016. But turmoil in global markets in January and February and a series of weak U.S economic statistics have reduced expectations to one hike in September or December. As predicted by Fed Funds futures, the chance of a rate hike at Wednesday's FOMC meeting is less than 10 percent.
The Fed's preferred inflation gauge, the Commerce Department’s core personal consumption expenditure index, core PCE for short, which has smaller hotel and rental components, registered 1.7 percent in February, its highest level since July 2014. It has moved steadily higher since reaching 1.3 percent last July.
Industrial production, the measure of manufacturing, mining, drilling and utility activities, plunged 0.5 percent in February, the fifth decline in the last six months. Utility output sank by the most since March 2007. A reading of -0.3 percent had been forecast. January's score was revised lower to 0.8 percent from 0.9 percent. Annual production fell 1.0 percent after a 0.7 percent drop in January. Yearly productive activity has now dropped for four consecutive months, the first time since 1952 that has occurred without a recession.
Factory output, a part of the overall industrial picture, rose 0.2 percent in February after a 0.5 percent gain in January, for the first back to back advance since April 2015. It followed output declines in five of the six prior months. This two month rise may indicate that demand for U.S manufactured goods is beginning to return after suffering the effects of a strong doll, precipitous drop in mining and oil activity and weakening global economic growth for most of the past two years.
Manufacturing production, which accounts for about 12 percent of GDP has been negative or flat in eight of the last 14 months, a string unmatched since the recession. It had been predicted to rise 0.1 percent in in February.
Capacity utilization, a measure of the amount of the U.S industrial capacity in use each month fell to 76.7 percent in February from 77.1 percent the prior month. It had been expected to be 76.9 percent. Usage has been dropping for more than a year since reaching a post-recession high in November and December 2014 at 79.0 percent.
The Fed has been counting on the continuing performance of the labor market in creating jobs, and the declining unemployment rate to force employers to raise compensation. That had appeared to be happening in the second half of last year as average hourly earnings jumped from a 2.0 percent a year in June to 2.6 percent in December. But that six month surge may have been associated with legislated increases in the minimum wage in many states rather than internal labor market wage pressures. By February annual gains had dropped back to 2.2 percent.
Today’s real average weekly earnings reinforced the dearth of wage pressure in the U.S. labor market. Yearly gains in real wages skidded to 0.6 percent in February an almost 50% drop from the 1.1 percent rate in January. It is a move back into the sub-one percent range that existed from 2011 to 2014, when the average weekly increase in pay measured just 0.2 percent annually.
Yesterday’s retail sales, disappointing across the board in the February results and the large negative revisions to the January numbers and the recent increases in the U.S saving rate, seem to confirm that the American consumer is in no mood to power GDP above its 2.1 percent annual growth rate of the past six years.
The Federal Reserve governors will issue their rate decision at 2:00 pm today. They are expected to leave the Fed Funds target range unchanged at 0.25-0.5 percent.
Markets will be watching for any changes in the central bank’s characterization of the U.S economy and their assessment of global risks. Fed Chair Janet Yellen will host a new conference beginning at 2:30 pm EDT. The bank will also publish new rate projections, the famous 'dot plot’ and updated forecasts for growth, inflation and unemployment.
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