The Business News Week In Review

The week's inflation indications from February, whether headline consumer or producer price data, fell in step with the prior week's first indication on February inflation and that was average hourly earnings which, after their January jump, edged back into subdued territory. Inflation -- despite the nation's solid pace of economic growth -- will not be an immediately pressing issue for Federal Reserve's officials at the March FOMC who will have the luxury once again of fending off a foe that has yet to appear in force. Yet some of the week's data details do in fact hint at inflation's distant approach.

The economy

Strength in the dollar through 2015 and 2016 kept down imported inflation which became a fixed complaint in the Federal Reserve's frustrated efforts to generate price pressures. The strong dollar meant that domestic buyers were able to get more imported goods for their money which is another way of saying that prices for imported vehicles and imported consumer and capital goods dropped. But the dollar has been falling sharply over the last year, down a year-on-year 8 percent and down just over 6 percent the last two months as tracked by the graph's green line. Now domestic buyers are getting less for their money which sounds bad and probably is but not if you're trying to lift prices. And import prices have begun to climb in response though slowly, to 3.4 and 3.5 percent in January and February as tracked by the blue line. A country that needs and enjoys imports (and that is certainly the description for the U.S), is a country that is sensitive to exchange rates and import price levels.

Increases in imported prices are appearing deep in the data, not just for crude goods or supplies but for finished goods where change is generally slower to appear. Prices of imported capital goods have been climbing for the last year and have now emerged over the 1 percent line at a year-on-year 1.2 percent in February's data. Vehicles, at 0.7 percent, are also moving higher in some contrast to prices for consumer imports which are showing less change in what hints at price discounting among foreign firms trying to protect their U.S. market share. But it may be a question of time before consumer-goods discounting reverses in what would fuel an accelerated rise for total import prices. Something else that may feed imported inflation is the new tariff increases for imported primary metals, a factor that is likely to lift production costs for industrial goods and in turn be passed through to finished goods.

There may not be much pressure appearing yet in Washington's data but data from regional surveys and private samples are pointing, in complete contrast, to sharp acceleration now underway. The Philly Fed is among the most prominent of these samples and it shows the greatest traction for selling prices (the dark area of the graph) of the ongoing economic expansion. This means that the respondents to Philly's report are raising prices and the price hikes are sticking. And what does that do for the sample's inflation expectations? Well, they're going up (the light area of the graph) and for the last half year are far beyond anything seen so far in this expansion.

The FOMC reserves a line in its policy statements to assess changes in inflation expectations, or for the last couple of years the lack of change in these expectations. Popular measures for these expectations come from the Atlanta Fed, which samples businesses, and the consumer sentiment report which samples consumers. Both posted upticks in what are some of the first data coming out of the month of March with business expectations up 1 tenth to 2.1 percent, a rate hit several times over the last year, and with consumer expectations showing noticeable pressure, up 2 tenths this month to a 2.9 percent rate that was last seen in 2014. Are these, together with other readings like those from the Philly Fed, enough to trigger a change in the FOMC's description? If so and if expectations are upgraded, the outlook for this year's rate hikes could very well begin to look less gradual.

The week's inflation news also includes data that do not directly touch inflation, that is capacity utilization in the Federal Reserve's industrial production report. Capacity utilization has been depressed the last several years but is now, as tracked in the blue line, beginning to curve higher due to strength in mining output and what may be emerging strength in manufacturing output. The read line tracks producer prices which, though February's report proved soft, have been showing recent bursts of strength. These bursts are tied, at least in part, to emerging capacity stress that is making it more urgent for businesses, like the respondents to the Philly Fed, to muscle through price increases to their customers. The upward move for capacity utilization is tangible, at 78.1 percent in February for the first plus 78 reading in nearly 4 years.

Industrial production is showing increasing strength but not indications on consumer spending which may now be cooling as retail sales have posted three straight monthly declines. Yet stepping back and looking at the trend, as tracked in yearly rates, the news is more upbeat. Retail sales grew 4.0 percent by this measure in February which is actually slightly higher than January and still very respectable when looking at rates over the past couple of years. Though growth in consumer spending is still well short of being described as unsustainable and inflationary, the enormous strength of the labor market together with this year's tax cut do in fact point to higher spending ahead.

Housing is key a sector to watch for price pressures as home prices, growing between 6 and 7 percent, continue to show some of the highest rates of price growth anywhere in the economy. Yet, like the retail sales report, the week's housing data are not raising many inflation alarms. Both starts and permits slowed abruptly in February, down 7.0 percent for starts to a much lower-than-expected annualized rate of 1.236 million with permits down 5.7 percent to 1.298 million which was also lower than expected. In year-on-year terms, starts are now in the contraction column at minus 4.0 percent with permits, however, still safely in expansion mode at 6.5 percent. These results follow what were soft sales rates for housing during January and confirm that the sector, which accelerated into year end, has opened the year, like consumer spending, with the uninflationary blahs.

One place where there has been no blahs is the labor market. This year's biggest indications of economic strength have come from the two monthly employment reports with a jump in average hourly earnings headlining January's data and a jump in payrolls headlining February. And the earliest indications for what to expect in the March report are more of the same. Both initial and continuing jobless claims are trending lower to new record lows. This means that layoffs are low and would make another dip in the 4.1 percent unemployment rate, which is already well under prior definitions of full employment, no surprise at all. If imported prices are one place to watch for inflation, wages are perhaps the most closely watched place of all.

Markets: The global market is a two-way street

However much the outflow of trade depletes the domestic economy of dollars, incoming investment is an important offset. Foreign demand for U.S. long-term securities, especially the stock market of late, has been moving sharply higher. Foreign buying of U.S. equities has been on fire, posting strong gains in the last five reports including $34.5 billion in January which is the very strongest in records that go back 40 years. Foreign demand for U.S. equities often increases as the dollar goes down, giving foreign buyers more U.S. shares for their money. For the Fed, increases in asset values such as stocks can be a sign of overheating and in turn a future indication of inflation. It will be interesting to see how foreign investors reacted in February, if they reacted at all, to the stock market's gyrations.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2017	9-Mar-18	16-Mar-18	Change	Change
DJIA	24,719.22	25,335.74	24,946.51	0.9%	-1.5%
S&P 500	2,673.61	2,786.57	2,752.01	2.9%	-1.2%
Nasdaq Composite	6,903.39	7,560.81	7,481.99	8.4%	-1.0%
Crude Oil, WTI ($/barrel)	$60.15	$62.06	$62.27	3.5%	0.3%
Gold (COMEX) ($/ounce)	$1,305.50	$1,323.00	$1,313.50	0.6%	-0.7%
Fed Funds Target	1.25 to 1.50%	1.25 to 1.50%	1.25 to 1.50%	0 bp	0 bp
2-Year Treasury Yield	1.89%	2.27%	2.30%	41 bp	3 bp
10-Year Treasury Yield	2.41%	2.90%	2.85%	44 bp	-5 bp
Dollar Index	92.29	90.13	90.22	-2.2%	0.1%

The bottom line

Import prices, inflated by the yearlong decline in the dollar, continue to offer what may prove to be an early and, from the Federal Reserve's perspective, welcome indication of price pressures. And then there's always wage inflation which could, like in January, pop back up and take the market down with it. However much inflation data have yet to gain traction, the lower value of the dollar and enormous strength of the labor market may yet prove themselves, perhaps sooner than later, to be strong inflationary forces.