Inflation, jobs news could set course for rate hike
Lately, the economy has been marked by a good news-bad news narrative, with consumer spending accelerating and factory output and business investment floundering amid overseas weakness. That dichotomy should be on display again this week with reports on retail sales and industrial production. Meanwhile, data on inflation and jobs could be key to helping the Federal Reserve decide whether to raise interest rates this year for the first time in nearly a decade.
On Wednesday, the Commerce Department releases its report on retail sales for September. Consumer purchases have risen in recent months as a result of solid job growth, hefty savings from low gasoline prices, and reduced household debt. A broad measure of sales was likely tempered last month by the drop in pump prices, says Lewis Alexander, chief U.S. economist of Nomura. But a core reading that excludes gas, autos and other volatile categories is expected to have risen another healthy 0.4%.
Strong consumer demand has helped push up prices for apparel and other goods. That, along with rising apartment demand and rents, is partly offsetting the deflationary effects of a strong dollar and low oil prices, which have kept a lid on car import prices and helped cut airfares. Economists estimate the Labor Department will report Thursday that “core” prices, which exclude food and energy, ticked up, keeping annual price gains at 1.8% and bolstering hopes among Fed officials that inflation will drift back to their 2% target. That could make a rate hike this year more likely.
The rallying dollar has been an albatross for manufacturers, making exports more expensive for overseas customers. Strong consumer demand for new cars and trucks has helped cushion the blow, but UBS says that likely won’t be enough to prevent the Fed on Friday from reporting a second straight drop in industrial production in September. The labor market has been among the economy’s bright spots, adding more than 200,000 jobs a month this year. Payroll growth slowed in August and September.