The U.S. economy is starting to display pockets of price pressures, further stoking the debate among economists and market participants over the future path of inflation.
Among reports Wednesday, retail sales powered ahead with the strongest advance in seven months, topping all estimates and indicating hearty consumer demand at the start of the year.
Meanwhile, a measure of producer prices surged last month by the most in records dating back to 2009, while a private survey of homebuilders showed growing concern about soaring costs of building materials after a robust year for home sales.
While inflation gauges are expected to pick up steam this year, most notably in the second quarter, many economists—including those at the Federal Reserve—anticipate that annual price gains exceeding the central bank’s 2% target will prove temporary amid still-high unemployment.
Yet recent economic data and expectations of a potential $1.9 trillion in additional fiscal stimulus present upside risks to inflation expectations.
For instance, the health-care services component of the producer-price index, which feeds directly into the core personal consumption expenditures price index tracked by the Fed, surged in January. That introduces “upside risks to the Fed’s current forecast for core inflation,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG.
If sustained, the Fed may reach its inflation goal sooner than anticipated, “potentially bringing forward the timing of tightening,” he said.
The Labor Department’s PPI report also showed the cost of lumber and other construction materials were up 10.4% from January of last year, the most in records. Softwood lumber alone has surged 73%. Price pressures have also developed within manufacturing, where materials costs rose in January by the most since 2018.
On Capitol Hill, Democrats are pressing forward on President Joe Biden’s $1.9 trillion relief plan. Many Republicans say the package is too big, and even Lawrence Summers, who served as Treasury secretary under President Bill Clinton and as a senior economic adviser to Barack Obama, has cautioned a package of that size could spur an inflationary outbreak.
The impact of the relief package passed in December was evident in the 5.3% jump in retail sales, as $600 stimulus payments lined the pockets of consumers. Many Americans, however, are saving rather than spending the latest relief checks, potential tinder for a resurgence in demand later this year for services that have been particularly hard hit by the pandemic.