Retail sales fall, inflation picks up and markets sort it all out

On Monday, the Dow Jones Industrical Average rose over 400 points. After a pair of economic reports today, traders were bracing for more turbulence. [Photo by Drew Angerer/Getty Images]
On Monday, the Dow Jones Industrical Average rose over 400 points. After a pair of economic reports today, traders were bracing for more turbulence. [Photo by Drew Angerer/Getty Images]
Published Feb. 14, 2018

A pair of reports out today have put the economy on alert: inflation is rising more than expected while retail sales saw their biggest drop in almost a year.

Will there be an economic slowdown fueling the recent stock market turbulence? In early trading Wednesday, investors were mixed. The Dow Jones Industrial Average opened sharply lower before moving into positive territory by mid-morning.

Here's the latest news:

The Consumer Price Index, which measures how quickly prices are going up in the U.S. economy, rose at a faster than anticipated 2.1 percent in January compared to a year ago.

The monthly Labor Department report on the price of everything from gas to groceries was closely watched Wednesday, with Wall Street investors suddenly very concerned about inflation.

The stock market sell-off earlier this month that caused the Dow to fall over 1,000 points in a single day began after a Labor Department report showed wages grew at a better-than-expected pace in January.

Now another key gauge of inflation — CPI — is showing a similar upward trend.

Inflation around 2 percent is still very low, but Wall Street traders fear that this could be the beginning of a quick run up in wages and prices.

In a worst-case scenario, consumers and businesses might start pulling back on spending as they see prices rise rapidly in the coming months (or years). On top of that, the Federal Reserve typically responds to higher inflation by hiking interest rates, ending the easy money days that have fueled a 9-year stock market boom.

There are already signs of a spending slowdown. Americans cut back on purchases of cars, furniture and a variety of other products in January, pushing retail sales down by 0.3 percent, the biggest decline in 11 months.

The January decline, following no change in December, was the largest setback since a 0.5 percent fall in February of last year, the Commerce Department reported Wednesday.

The surprise slowdown comes after a three-month stretch of sizzling consumer activity, from September through November, which had fueled the most robust holiday sales in a decade.

The January weakness was larger than had been expected and could trim overall growth forecasts for the current quarter. Many analysts had believed that the economy might expand at a solid 3 percent pace in the current quarter, largely because they foresaw strong and sustained spending by Americans.

Auto sales fell 1.3 percent in January, the biggest monthly drop since August, and came on the heels of a smaller 0.1 percent setback in December.

But the weakness was not confined to the auto sector. Excluding autos, retail sales would have been flat in January and a number of key sectors from furniture to building supplies suffered declines.

Department store sales rose a solid 0.8 percent while a broader category that includes big box retail stores such as Walmart, rose a smaller 0.2 percent.

The booming internet shopping sector was flat in January, but is still 10.2 percent higher than a year ago.

Sales at gasoline service stations rose 1.6 percent, but that's partly due to rising pump prices.

The overall economy, as measured by the gross domestic product, grew at a solid 2.6 percent annual rate in the final three months of last year. That followed two quarters in which growth had topped 3 percent. That was a significant improvement from modest annual growth rates of around 2 percent the U.S. experienced during the economic recovery, now in its ninth year.

In recent years, investors put their money in riskier stocks since they were earning so little in interest at the bank or from bonds. But if inflation returns in force and the Fed hikes interest rates, it could cause Wall Street to redo the playbook. As bond yields rise, investors are likely to jump out of stocks and into bonds.

As the Fed lifts rates, companies and individuals also tend to borrow less, another potential damper on the economy.