Year-over-year inflation declined in January but at a slower pace. Inflation remains elevated and much higher than the Federal Reserve’s target. Inflation impacting lower-income households remains extremely high.
Retail sales increased more than expected in January. Adjusted for inflation, retail sales were unchanged year over year. Most categories are up year over year, and the consumer has definitely not thrown in the towel.
Residential construction trends were mixed in January, but single-family is continuing to decline in permits and starts.
Initial jobless claims declined in the latest week, but continuing claims continue to increase yet remain below pre-pandemic levels.
Inflation Declined Year Over Year but at a Slower Pace
According to the Consumer Price Index, year-over-year inflation declined in January but at a slower pace. As expected, the headline aggregate measure increased by 0.5% on a seasonally adjusted basis. The increase followed an upwardly revised 0.1% increase in December.
The core CPI, excluding Food and Energy, increased by 0.4%, the same as in December. Energy prices rose in January as gasoline and gas utility services increased, contributing to inflation. However, shelter and some other services, such as medical care services, saw decelerating price growth or outright declines.
Used-car prices and airline fares saw large declines. New-vehicle prices saw decelerating gains, and notably, the decline for new-vehicle prices in December was revised to an increase, which is more consistent with what we have observed in actual new-car prices, according to Kelley Blue Book average transaction prices.
On a year-over-year basis, core CPI declined to a 5.6% increase from 5.7% previously. The overall CPI from a year ago declined to 6.4% from 6.5% previously. Our estimated CPI applied to the lowest income quintile declined slightly to 15.5%.
Retail Sales Increased More Than Expected in January
Retail sales increased in January more than expected. The initial estimate for January showed spending up by 3% when 2% was expected. The auto sector performed better than the overall market as sales, excluding motor vehicles and parts, increased by 2.3%, while sales of motor vehicles and parts increased by 5.9%. Even though gas prices rose in January, spending at gas stations was unchanged.
All major categories saw gains in January. Food services and drinking places (+7.1%) and motor vehicles and parts had the largest gains. With the increase in sales, retail sales were up 6.4% from a year ago on a nominal basis, up from 5.9% in December. Compared to last year, only furniture, home furnishing, electronics, and appliances (-0.1%) were down, while food services and drinking places (+25.2%) were up the most.
Adjusted for inflation using the CPI, retail sales increased 2.4% for the month and were unchanged from last year. The retail data no longer point to consumers retreating. This is consistent with continued strong spending in January’s latest credit card spending data.
Home Construction Mixed as Mortgage Rates Stay High
Residential construction trends were mixed in January. The seasonally adjusted annualized rate of starts declined 4.5% when a decline of 1.9% was expected, and prior estimates were revised down. Permits increased by 0.1% when a 1% increase had been expected. The starts decline was in both multi-family and single-family and telling given that the weather was better than normal for January.
After the January decline in total, starts were down 21.4% year over year and down 16.6% compared to January 2019. Permits were down in single-family by 1.8% compared to a 2.5% increase in multifamily. Permits were down 27.3% from a year ago and down 10.3% compared to 2019. Permits lead starts, so the permitting pace at 1.339 million units was slightly ahead of the 1.309 million starts pace, which indicates that starts could increase in the coming months.
The big increase in mortgage rates over the last year has clearly reduced demand for single-family homes, but mortgage rates declined relative to the peak through January. Massive growth in multi-family construction is likely leading to a glut of new apartments just when slowing economic growth reduces demand. Compared to 2019, single-family permits were down 24.8% in January, while multi-family permits were up 15.4%.
Jobless Claims Declined in Early February, Staying Historically Low
Seasonally adjusted initial jobless claims declined by 1,000 to 194,000 for the week ending February 11. Non-seasonally adjusted initial claims fell by 9,000. The holidays create a noisy seasonal data pattern in initial claims, but we should be well past the noise now.
Continuing claims, representing people who previously filed and remain on traditional unemployment compensation, increased by 16,000 from the previous week, reaching 1.70 million as of the week ending February 4. That level of continuing claims was 67,000 lower than before the pandemic and the highest level since mid-December.
The latest data shows that the broadest measure of continuing claims increased by 10,000 to 1.95 million, which lags the traditional number and is not seasonally adjusted. That total measure is up 218,000 over the last four weeks but is 150,000 lower than the pre-pandemic level but at the highest level in a year.
The labor market is not as strong as it was a year ago, but there is little evidence of major deterioration in the jobless claims data. Moreover, jobless claims remain at historically low levels relative to the job base.
Jonathan Smoke is the chief economist at Cox Automotive.