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Inflation up, retail sales steady in February

Inflation up, retail sales steady in February

NEW YORK — Energy prices once again pushed U.S. inflation higher in February as the all items index edged up just 0.1 percent, the smallest monthly increase since July. However, that was enough to push the year-over-year rate up to 2.7 percent from 2.5 percent in January, RBC Economics reported.

The increase in year-over-year inflation was largely due to energy price base effects. While the energy index fell in February (with gasoline prices down 3 percent), the decline was more significant a year ago when oil prices hit their low point. As a result, the year-over-year rate of energy price inflation picked up to 15 percent from 11 percent in January.

Core prices (ex food and energy) posted a 0.2 percent increase with the year-over-year rate edging down to 2.2 percent in February. Prices for non-energy services rose while core commodities were flat.

Services prices were up 3.2 percent year-over-year, the fastest pace since November 2008. The shelter component remains a significant source of inflation, though prices for services ex shelter have also trended higher for more than a year.

“The increase in headline CPI inflation to 2.7 percent is consistent with market expectations and was once again largely an energy story,” said Josh Nye, an RBC economist. “The now-inflationary impact of energy prices is expected to prove transitory ― indeed, we think today’s reading will mark the near-term peak in CPI inflation ― and thus won’t alter the Fed’s plans for removing accommodation gradually.

Beneath the higher headline reading, core inflation edged down from its post-recession high but there was some evidence of firming domestic price pressure, and a tight labor market and rising wages should support underlying inflation going forward,” he explained.

“Today’s report is consistent with Federal Reserve Chair Janet Yellen’s comments that it would be unwise to wait too long before further removing accommodation,” said Nye. “We expect the Fed will announce a 25 basis point rate hike this afternoon and we’ll be paying close attention to the committee’s ‘dot plot’ to see if three hikes per year in 2017 and 2018 is still seen as an appropriate pace given upside risks to inflation from potential fiscal policy stimulus.”

U.S. February retail sales rise a minimal 0.1 percent

February retail sales rose an expected 0.1 percent in the month though the increase followed a much stronger and upwardly revised 0.6 percent gain in January.

Though the level of auto sales remained high in the month it was little changed from January resulting in motor vehicle dealership sales in down a minimal 0.2 percent.

Gas station receipts dropped 0.6 percent weighed down by indications of falling gasoline prices.

Sales at building material stores continued to be strong rising 1.8 percent building further onto outsized gains in January and December of 1.2 percent and 2.2 percent, respectively.

Control retail sales, which excludes autos, gas stations and building material stores rose a modest 0.1 percent though this followed a sizeable and upwardly revised gain of 0.8 percent in January.

“The data is consistent with our expectation that annualized consumer spending growth in the first quarter will moderate to 1 1/2 percent from the 3.0 percent recorded in Q4,” said Economist Laura Cooper.

“Lower gas prices and stalling auto sales, albeit at elevated levels, weighed on retail activity in February,” she added. “However strength elsewhere resulted in retail sales still managing to eke out a gain following an upwardly revised 0.6 percent increase in January.

“The leveling out of auto sales following robust gains late in 2016 points to a slowing in consumer spending early in 2017 with today’s report signaling that the quarterly increase is likely to come in at 1.5 percent, about half the pace of the previous three quarters,” said Cooper.

“Recent robust employment gains suggest little reason to expect this slowing to continue,” she added. “As well, indications of an offsetting strengthening in Q1 business investment will allow overall GDP growth to remain at a slightly above-potential pace in the current quarter.

“Sustained above-potential growth prompted the Fed to return to tightening mode late last year and is expected to keep them tightening through 2017 including a widely-expected 25-basis point hike at this afternoon’s Federal Open Market Committee meeting,” she explained.

SOURCE: RBC Economics press release

RBC contacts:

Paul Ferley, Assistant Chief Economist (416) 974-7231

Macroprudential regulations bite, but households look elsewhere

·         Household net worth climbed to a record high of $10.3 trillion in Q4/16 from $10.2 in Q3/16

·         The debt-to-income ratio climbed to another record high of 167.3 percent from 166.8 percent in Q3/16 (previously reported as 166.9 percent)

$130B was added to household assets in Q4/16, the smallest gain since Q3/15 and reflected a slowdown in both financial assets (up $77B following a $219B gain in Q3/16) and non-financial assets (up $53B vs. $83B in Q3/16)

·         Households asset values reached $12.3 trillion in Q4/16 with real estate accounting for just over 40 percent

·         Households owed $2.06 trillion in debt to end 2016 with $1.33 trillion tied up in mortgage loans.

·         The pace of debt accumulation exceeded that of both assets and net worth to drive the credit market debt-to-asset and debt-to-net worth ratios up for the first time in a year, with each rising by 0.1ppts each to 16.5 percent and 19.8 percent, respectively.

·         Owners’ equity as a  percent of residential real estate remained elevated at 74.0 percent

·         Household mortgage payments were evenly split between principal and interest payments to end 2016

Our Take:

The key takeaway of today’s report on the financial health of Canadian households was not a new all-time high for the debt-to-income ratio, although worrisome, but rather diverging credit trends. A slowdown in mortgage borrowing by Canadian households took hold in the final three months of 2016 as policy aimed at curbing hot housing market activity took a bite out of demand for loans.  A slower pace of mortgage growth is common as the winter weather sets in, but the introduction of tighter borrowing regulations in the period exacerbated the drop with annual growth in this credit component easing to a 5-quarter low. The pace of existing home sales slowed sharply over the same period with the downtrend carrying over into 2017; a sign that the slowing mortgage trend will continue and could be further dampened should the red-hot Toronto market provoke a regulatory response.

The slowdown in mortgage growth may be a welcome reprieve for policymakers, but belies the fact that borrowing rates continued to fuel households’ appetite for other forms of debt. Consumer credit, led by lines of credit and personal loans, jumped in the final quarter to boost overall household debt accumulation in the quarter. The typically unsecured nature of this debt commands higher borrowing rates and variable payments, leaving households increasingly vulnerable to a looming uptrend in interest rates.  As such, vulnerabilities are brewing under the surface of the headline $10.3 trillion in net wealth; particularly as upward pressure on servicing elevated debt levels alongside a policy-led slowdown tempering home valuations could increasingly constrain tapped-out households.

RBC contacts:

Laura Cooper, Economist (416) 974-8593

For more economic research, visit our web site at

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About Greg Gerber

Greg Gerber is a freelance writer and podcaster who has been writing about the RV industry since 2000. He is the former editor of RV Daily Report.

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