Inflation Continues to Run Hot as Retail Sales Disappoint

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.5 percent in December, a deceleration of three-tenths from November, according to the Bureau of Labor Statistics (BLS). On an annual basis, the CPI was up 7.0 percent, the fastest pace since 1982. Core CPI rose 0.6 percent over the month and 5.5 percent annually, also the fastest rate since 1982. Durable goods prices continued to rise as, on an annual basis, new vehicle prices increased 11.8 percent, used cars and truck prices rose 37.3 percent, while furniture prices were up 17.3 percent. Apparel prices increased 1.7 percent over the month amid COVID-related disruptions in Asia and continued port congestion. Gasoline prices fell back 0.5 percent due to lower oil prices and the price for piped gas was down 1.2 percent as natural gas prices fell, though both have rebounded somewhat in recent weeks. Both rent and owners’ equivalent rent (OER) rose 0.4 percent over the month and 3.3 percent and 3.8 percent on an annual basis, respectively.
• The Producer Price Index (PPI) for final demand of goods and services rose 0.2 percent in December, a deceleration of eight-tenths from November and the slowest monthly gain since November 2020, though this was largely due to a 3.3 percent drop in energy costs and a 0.6 percent decline in food costs, according to the BLS. Prices for final demand of goods fell 0.4 percent, while final demand for services prices were up 0.5 percent. On an annual basis, prices for final demand were up 9.7 percent, only one-tenth below the record-setting annual growth seen last month. Core PPI (less food, energy, and trade services) increased 0.4 percent over the month and 6.9 percent on an annual basis.
• Retail sales and food services declined 1.9 percent in December, the largest monthly decline since February 2021, according to the Census Bureau. Core retail sales (excluding food services, autos, building supplies, and gas stations), fell 3.1 percent, largely because online sales plummeted 8.7 percent, furniture store sales fell 5.5 percent, and sales at electronics and appliances stores were down 2.9 percent. Food services and drinking places sales declined 0.8 percent. Sales at building materials, garden equipment and supply dealers were one of the few major categories to increase, rising 0.9 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 0.5 points to 98.9 in December. The percent of firms planning to increase employment rose 3 percentage points to 28 percent. The share of firms raising average selling prices declined 2 percentage points from its record high in November to 57 percent, while 48 percent of firms stated they were raising worker compensation, a series record and an increase of 4 percentage points. Relatedly, a record 22 percent of firms reported inflation was their single most important problem, and another 13 percent of firms reported it was the cost of labor.

Forecast Impact:

The robust, broad-based CPI report was largely in line with our expectations. While we continue to expect some current inflationary pressures, such as those created by elevated durable goods prices, to eventually ease as supply chain bottlenecks are resolved, our primary takeaway is that the CPI report is additional support that there may be more sustained underlying inflationary pressures. For example, OER continues to accelerate on an annual basis and is likely to do so through at least 2022, as this measure typically lags significantly behind home price growth, which has been robust. Further, the PPI report and NFIB survey support the notion that wage pressures will continue to lead to higher prices, as final demand for services costs hit a record 7.9 percent annual growth rate in December and a growing share of small businesses cite inflation or labor costs as their primary business concern. We expect inflation will slow somewhat beginning in Q2 2022 as some components, such as energy and durable goods, will likely drag on the headline number, but we believe that underlying and persistent price pressures will likely cause inflation to run well above the Fed’s target in 2022 and 2023.

While we had expected softness in the December retail sales report reflecting an earlier than typical holiday shopping season, it came in well below our expectations, and considering the continued price increases over the month, this is suggestive of an outright decline to real consumption growth in December. The smaller decline in spending at restaurants could have been caused by the Omicron variant, but that’s difficult to reconcile with the considerable drop in online sales in December. In addition to the aforementioned early holiday shopping season, we believe it’s more likely that supply chain bottlenecks and higher prices significantly hampered December sales. The softness in both November and December suggest consumer spending, and thus GDP, may have been weaker than we had expected in 2021 Q4.

Nathaniel Drake
Economic and Strategic Research Group
January 14, 2022

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.