US Daily Economic Notes:Do the latest data change the Fed outlook

Commentary for Thursday: The January CPI report showed sturdy gains inboth headline and core inflation measures. In addition, we learned that retailsales excluding automobiles, building supplies and gasoline stations, which isthe core of the report and an input into goods spending in the GDP accounts,outperformed expectations last month. What does this mean for a "datadependent"Fed? In our view, not much, as we continue to see June as the mostlikely timing for the next rate increase.

    There are several reasons why these latest data points do not change our outlookfor Fed policy: One, the outperformance in core CPI inflation last month wasmostly due to core goods prices, which jumped 0.4%. This was the largest onemonthgain since October 2009 (+0.5%). This was "driven" by new vehicle pricesand apparel. The former was up +0.9% in January, which was also the largestincrease since October 2009 (+1.7%), when the government instituted its "cashfor clunkers" program. In fact, this was the third largest monthly gain for newvehicle prices in the last 36 years. Regarding apparel prices, they surged 1.4% inJanuary, which was the largest monthly gain since February 2009 (1.6%) and thesecond largest increase in the last 27 years. In turn, new vehicles and apparelprices were responsible for nearly all of the increase in core goods prices andthus contributed a tenth to overall core CPI inflation last month.

    Monetary policymakers are likely to look through these unusually large increasesin the aforementioned core goods series. More important is the trend in coreservices inflation, which has been fairly stable over the past year. CPI servicesless energy services were up 0.3% last month, which had the effect of keepingthe year-over-year growth rate of this series steady at 3.1%. Core services priceshave been range-bound between 3.0% and 3.2% since January 2016. While thisgrowth rate is in line with the previous cycle average, the fact that it has beenstable over the past year does not point to an overheated labor market.