CPI still running HOT

This week’s Empire State Manufacturing Index report was the third worst on record, behind only the frigid financial winters of 2008 and 2020.   Prices are cooling rapidly: Bonds rallied this week after Producer Prices were reported down 2% in December from the month before. The tepid year-on-year rate of 6.9% is a long way from the scorching 22% we had last summer.   It’s not just goods prices icing the economy:

The services component of PPI fell to just 4.5% in December. PPI does not include rent, which makes it a better measure of services inflation than CPI, where the last services print was a too-hot 7.5%. The Fed, of course, will pick the hotter number to worry about.   Winter clearance: Retail sales fell 1.2% in December from November, at least in part because retailers are cutting prices. And inventories remain elevated, so you should have plenty of time to take advantage.   Switching cards: On its earnings call this week, Wells Fargo management noted that credit card spending is sharply higher while debit card spending is flat. Surging credit balances can soften the economy’s landing, but it’s another sign that Winter is coming.   What’s still too hot? The next CPI release, probably. After a series of near-zero prints, the Cleveland Fed sees January CPI rebounding to 0.53% MoM (and 6.4% YoY). That should be reason enough for the FOMC to ignore the cold front and stay hawkish.   And that’s likely to make it a rough reentry for the economy.