One of the biggest drivers of the American economy unexpectedly improved again in October, increasing hopes for a strong overall fourth quarter economic performance. A separate report showed just a minimal rise in inflation, but it’s likely strong enough to led the Federal Reserve to push interest rates higher next month.
A new Commerce Department report showed retail sales increased 0.2% last month from September, better than analysts were expecting. September’s performance was revised higher to show a 1.9% gain, following an originally estimated 1.6% improvement.
Compared to October 2016, U.S. retail sales last month increased 4.6%.
According to Reuters, the October gain was due to an increase in purchases of motor vehicles and a range of other goods, which offset a decline in demand for building materials, suggesting consumer spending remained fairly strong early in the fourth quarter.
Control group sales in October, which exclude autos, food, gasoline and building materials, were less impacted by the hurricanes than they were in September, and were up a stronger 0.3% in October. Control group sales are up a solid 3.5% average annualized rate over the past three months, which suggests spending has solid momentum going into the last quarter of 2017, according to Wells Fargo Securities.
Control group sales, which go into the calculation of personal consumption expenditures for the nation’s gross domestic product (the widest measure of economic growth), were up more than the headline reading in October because they were not adversely impacted by the drop in gasoline prices, said Eugenio J. Alemán, senior economist at Wells Fargo.
“They also strip out volatile spending on food, auto and home improvement stores, and are thus a good gauge of underlying consumption demand,” he said. “Control group sales saw momentum increase in October, which is good news for retailers going into the holiday season and for fourth quarter GDP calculations if this strength holds up.”
Consumer Prices Up 2% Over Past 12 Months
Meantime, a Labor Department report showed prices at the consumer level edged up just 0.1% in October from the month before. This gain in the Consumer Price Index followed a 0.5% jump in September.
This latest hike, as well as figures that showed the CPI has increased 2% over the past year, were both in line with analysts’ expectations and down from a 2.2% annual rate in September.
Higher prices for shelter were the main factor in the overall increase as energy prices fell, though a decline in gasoline costs outweighed increases in other energy sectors. Prices for food were unchanged over the past month.
So-called “core prices,” which omit volatile food and energy prices, increased 0.2% on a month-over-month basis. That was enough to push the year-over-year rate of growth in October up to 1.8% after five straight 1.7% readings.
A sharp drop in telecommunication prices earlier this year is still biasing the measure lower. Excluding that drop, core price growth would be right at the Federal Reserve’s 2% inflation objective.
“There is still little evidence that inflation is getting out of hand, but the stabilization in core measures in recent months and indications that demand growth remains solid, including somewhat stronger-than-expected October retail sales separately reported this morning, should reassure the Fed Reserve that price growth will tick higher rather than lower going forward,” said Nathan Janzen, senior economist at RBC Economic Research.
He said a 0.25% hike in the fed funds target range is widely expected in December when the central bank meets.
“We continue to expect further demand growth and further tightening in labor markets will ultimately prompt a gradual hiking cycle to continue next year,” Janzen said.
The report on consumer prices follows another one from the Labor Department the day before that showed prices at the wholesale level posted the biggest annual jump in five years.
The Producer Price Index moved 2.8% higher in October when compared to the same time a year earlier, as it also posted a 0.4% gain from September.
The year-over-year gain was driven by higher energy prices, which failed to advance from September to October, while higher food prices were drove the month-over-month increase.