Bloomberg News

Improved U.S. Growth Lifts Inflation as Claims Drop: Economy

January 16, 2014

Cost of Living Rises

Food costs rose 0.1 percent. Chipotle Mexican Grill Inc. is paying attention to higher food prices. Chief Financial Officer John R. Hartung said that the company has seen “inflation creep in” starting in the second half of 2012, and despite improvement in early 2013, food costs are at the higher end of their usual range. Photographer: Patrick T. Fallon/Bloomberg

An improving U.S. economy is underpinning inflation, limiting firings and lifting consumers’ moods, brightening the outlook for growth at the start of 2014.

The consumer-price index rose 0.3 percent in December, the biggest gain in six months, as fuel and rents climbed, figures from the Labor Department showed today in Washington. Claims for jobless benefits dropped last week to the lowest level since November, the Bloomberg Consumer Comfort Index (COMFCOMF)’s monthly expectations gauge improved to a five-month high and manufacturing picked up in January, other reports showed.

The expansion “is gaining speed and breadth at the same time, which makes it more sustainable,” said Joe Carson, director of global economic research at AllianceBernstein LP/USA in New York. “We’re now seeing consumption, housing and investment all moving in the same direction, along with exports. That’s a very favorable backdrop.”

Related:

  • Consumers’ Outlook on U.S. Economy Improves to a Five-Month High
  • Homebuilders Remained Confident in January on Rising U.S. Sales
  • Jobless Claims in U.S. Fall to Lowest in More Than a Month

Companies are starting to gain pricing power as rising employment, stocks and home values help boost household wealth and spending. A pickup in inflation toward the Federal Reserve’s 2 percent goal and faster growth mean the central bank’s unprecedented stimulus is paying off, which would allow policy makers to keep reducing the pace of monthly asset purchases.

“Modest, stable inflation is good for the economy,” said David Berson, chief economist for Nationwide Insurance in Columbus, Ohio. “This is exactly what we want to see.”

Shares Drop

Stocks fell, after the Standard & Poor’s 500 Index closed at a record yesterday, as Best Buy Co. reported lower sales and earnings at companies from Citigroup Inc. to CSX Corp. disappointed investors. The S&P 500 decreased 0.1 percent to 1,845.89 at the close in New York.

The increase in consumer inflation last month matched the median forecast of 87 economists surveyed by Bloomberg. Estimates ranged from unchanged to a gain of 0.4 percent.

Prices rose 1.5 percent in the 12 months ended December following a 1.7 percent advance over 2012. While it marked the smallest gain since 2010, the year-to-year readings are edging higher after reaching 1 percent in October, which was the smallest gain since 2009.

The core-price measure, which excludes food and fuel, rose 0.1 percent in December, restrained by a record decrease in medical commodities such as prescription drugs. The core index climbed 1.7 percent over the past 12 months, also the smallest annual advance since 2010.

“Core inflation is going to gradually, gradually converge to the 2 percent target that the Fed has,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut.

Fewer Claims

Another report today showed fewer Americans filed applications for unemployment benefits last week, a sign the labor market continues to strengthen.

Jobless claims decreased by 2,000 to 326,000 in the week ended Jan. 11, the least since the end of November, from a revised 328,000 in the prior period, according to Labor Department figures. The median forecast of 51 economists surveyed by Bloomberg called for 328,000.

Americans in January became less pessimistic about the economy amid signs the expansion was gaining momentum.

The gap between positive and negative expectations for the economy shrank to minus 5, its best reading since August, from minus 11 in December, according to data from the Bloomberg Consumer Comfort Index. A decline in the weekly measure for the period ended Jan. 12 to minus 31, a one-month low, underscores the uneven improvement in sentiment.

Gaining Confidence

“Households are confident that the increase in overall economic activity is sustainable and expect gains in 2014,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “The improvement in the labor sector, rising equity markets and a noticeable increase in total private credit creation at the end of 2013 has resulted in a more confident consumer.”

Home builders also remained optimistic this month, another report showed. While the National Association of Home Builders/Wells Fargo sentiment gauge fell to 56 from 57 in December, according to figures from the Washington-based group, readings greater than 50 mean more respondents report good market conditions.

The December reading was revised down from a prior estimate of 58, a level reached in August that was the highest since November 2005.

“Many markets continue to improve and this bodes well for future home sales,” NAHB Chairman Rick Judson, a home builder from Charlotte, North Carolina, said in a statement.

Manufacturing Pickup

Manufacturing also showed signs of making strides in the new year. The Federal Reserve Bank of Philadelphia’s factory index increased to a three-month high in January as sales and employment improved. The increase was in line with a similar measure issued earlier this week by the Federal Reserve Bank of New York, which jumped in January to a 20-month high.

As American consumers buy more, it could push prices closer to the Fed’s target. Consumer prices rose 0.9 percent in November from a year earlier, according to the personal consumption expenditures deflator, an inflation measure watched by the Fed, still short of the central bank’s goal.

Policy makers began reducing monthly bond purchases by $10 billion in January to $75 billion, citing an improving job market.

Federal Reserve Bank of Chicago President Charles Evans, who has supported record stimulus, said Jan. 15 that the central bank’s slowdown should be seen as a shift in emphasis toward keeping interest rates near zero for a longer time -- partly because of still-low price pressures.

Low Rates

“We will not prematurely reduce accommodation in an economy with elevated unemployment and very low inflation pressures,” Evans said. The U.S. added 74,000 jobs last month, fewer than the most pessimistic projection in a Bloomberg survey, a Labor Department report showed Jan. 10.

The CPI is the broadest of three price gauges from the Labor Department because it includes goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Wholesale prices climbed 0.4 in December, according to Labor Department data released last week. December import prices were unchanged from November, when they fell more than initially reported, data showed Jan. 14.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres in Washington at ctorres2@bloomberg.net


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