February 14, 2018 10:15 AM, EST

Consumer Prices Top Forecasts, Sending Markets Tumbling

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U.S. consumer prices rose by more than projected in January as apparel costs jumped the most in nearly three decades. The report sent Treasuries and stocks tumbling, as it added to concerns about an inflation pickup that have roiled financial markets this month.

The consumer price index rose 0.5% from the previous month, above the median estimate of economists for a 0.3% increase, a Labor Department report showed Feb. 14. Excluding volatile food and energy costs, the so-called core gauge increased 0.3%, also above forecasts for 0.2%. It was up 1.8% from a year earlier, higher than the 1.7% estimate.

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The yield on 10-year Treasuries rose to 2.86%, while U.S. stock futures fell, as the figures renewed investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated. The data followed wage figures earlier this month sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years.

“Some of laws of normal economic nature seem to be reasserting themselves,” Nathan Sheets, chief economist for PGIM Fixed Income and a former Fed and Treasury official, said on Bloomberg Television.

While Sheets said he wouldn’t raise his outlook for the path of inflation, the report “gives me increased confidence that we are in a place where inflation is likely to be gradually rising more or less in line with the Federal Reserve’s forecast and consistent with an economy where we are seeing diminished slack, strengthening labor markets, solid growth.”

The 1.7% monthly gain in apparel prices, which account for about 3% of the CPI, was the biggest since 1990. Women’s apparel costs jumped a record 3.4%, the report showed.

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Other items contributing to the gain in CPI included rents and owners’ equivalent rent, which both rose 0.3% from December; medical care, up 0.4%; and motor vehicle insurance, which advanced 1.3%, the most since 2001.

The increase in the core CPI brought the three-month annualized gain to 2.9%, the fastest since 2011, according to data compiled by Bloomberg.

Retail Sales

A separate report showed U.S. retail sales unexpectedly fell in January and December figures were revised downward, suggesting consumer spending is on a slower track in the first quarter.

Including all items, the main CPI gauge rose 2.1% from a year earlier, the same pace as in December and exceeding forecasts for a 1.9% increase.

The report follows the Labor Department’s annual revisions to CPI last week that took the December monthly increase in the core index down to 0.2%, from an initially reported 0.3%. The December gain in the main index was revised upward to 0.2% from 0.1%.

What Bloomberg Economists Say

Higher-than-expected inflation and weaker-than-expected consumer spending in January start the year off on the wrong foot, but clearly do no establish a compelling trend. Inflation pressures are rising, to be sure, but not as much as the headline (inflated by energy) or even the core (showing residual impact of prior dollar weakening) would suggest. Meanwhile, soft retail sales are probably the result of two factors — one, adverse weather shuttered sales at the start of the month (e.g. motor vehicles -1.3%); two, January may be a “pause to refresh” after a gangbusters fourth quarter.

— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics

Policy makers look at the core index to better gauge underlying inflation because food and energy prices tend to be volatile. The latest report showed energy prices rose 3% from the previous month and food costs advanced 0.2%.

The two main U.S. stock indexes endured wild swings last week on concerns that inflation would spur higher interest rates more quickly, boosting borrowing costs for companies. Even so, equities have recovered some ground, advancing for three trading sessions in a row through Feb. 13.

Fed Outlook

While economists and investors have seen a Fed interest-rate hike in March as a near-certainty, the details of the latest CPI report could play a role in the timing and number of rate increases throughout 2018.

The central bank’s preferred gauge of inflation — a separate figure based on consumer purchases and issued by the Commerce Department — has mostly missed its 2% goal in the past five years. The measure excluding food and energy is also below the Fed’s target. January data are due for release on March 1.

Fed policy makers will also have February CPI data in hand before they next meet March 20-21 in Jerome Powell’s first gathering as chairman. Powell, speaking Feb. 13 at his ceremonial swearing-in, suggested that the central bank would push ahead with gradual interest-rate increases, and that officials “remain alert to any developing risks to financial stability.”

Retail sales fell 0.3% in January from the previous month, the most since February 2017, according to the Commerce Department, compared with the median estimate of economists for a 0.2% increase. December’s figures were revised to show little change, after an initially reported gain of 0.4%.

Other Details

• Wireless-phone service prices fell 0.2%.

• Used-vehicle prices posted a 0.4% increase last month; the index for new vehicle costs fell 0.1%.

• The price of airfares fell 0.6%, the third straight drop.

• Cost of lodging away from home fell 2%.

• Average hourly earnings, adjusted for inflation, rose 0.8% from a year earlier, according to separate report Feb. 14 from Labor Department.

• The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services; about 60% of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.

With assistance by Sophie Caronello, Chris Middleton, and Shelly Hagan