September Consumer Prices, Real Earnings and Retail Sales

KEY DATA: CPI: +0.5%; Excluding Energy: +0.1%/ Real Earnings: -0.1%/ Retail Sales: +1.6%

IN A NUTSHELL: “The sharp rise in consumer prices may have been hurricane driven, but for those on Social Security, it was great news.”

WHAT IT MEANS: Inflation accelerated in September – not! If all you do is read the headline number, that is your takeaway. But the reality, as usual, is in the details and that is a different story. There was, as we all know, a surge in gasoline prices as the Harvey hit the supply chain hard. Excluding energy, inflation remained quite tame. Food costs rose minimally even though the all-important snack category posted a large decline, vehicle prices fell, medical goods expenses dropped sharply and apparel prices were also down. Shelter costs, though, continue to rise at a moderate pace. Next month, the index could be flat to down as much of the gasoline price gain has already dissipated. In other words, there really is little to worry about when it comes to inflation.

But the increase in prices, even if temporary, is having impacts. First of all, while hourly earnings rose solidly in September, when adjusted for inflation, household earnings were down. As I always say, it is hard for consumers to buy more when their purchasing power is going nowhere. On the other hand, Social Security recipients are going to be quite happy. The cost of living adjustment is based on the third quarter over third quarter rise in the Consumer Price Index for wage earners and that was up 2%, in no small part because of the surge in gasoline costs. The adjustment will be the largest since 2012, when gasoline prices surged as well.

The hurricanes had a large impact on retail sales, as well. Total retail demand soared in September and the major reasons for the gain could be traced to the weather. Gasoline sales jumped as prices surged. Vehicle sales exploded as households who had their vehicles damaged started replacing them. And sales at home supply stores were up sharply as people bought everything they could to first batten down the hatches and then start to rebuild. Since so many had abandoned their homes, they wound up eating out and restaurant sales were up solidly. Just as consumer prices will likely reverse in the next month, it is likely that retain sales will be quite weak when the October report is released.

MARKETS AND FED POLICY IMPLICATIONS: The sudden increase in retail demand is likely to cause third quarter growth to come in somewhat better than expected before the hurricanes hit. But what Mother Nature may have given in the third quarter, she will likely take away in the fourth. That is true when it comes to consumers spending as well as inflation. I warned the data would be choppy and it looks like the waves will be fairly high. The Fed will not be swayed by the inflation report as there will be two more reports before the December FOMC statement is released. By then, the members should have a better idea about the pace of consumer prices. Therefore, investors will likely continue to focus mostly on earnings.