Comerica Economic Weekly

Inflation heated up in February as petroleum prices climbed on geopolitical tensions. Global spare production capacity remains tight due to civil unrest in the Middle East and North Africa. Added to that pressure are U.S. and European sanctions against Iran and Iran’s retaliatory threat to disrupt tanker traffic through the Strait of Hormuz.  U.S. gasoline prices were up 6.0 percent in February. Headline consumer inflation was up 0.4 percent in February, reversing a declining trend in the month-to-month percent change. The overall energy component of the CPI was up 3.2 percent in February, moderated by declining natural gas prices. Weak natural gas prices plus a mild winter is taking the pressure off of residential heating bills, cushioning some of the pain at the gasoline pump.  The core CPI (all items less food and energy) gained just 0.1 percent in February. The producer price index for finished goods also gained 0.4 percent in February and core producer prices were up 0.2 percent. In its statement from March 13, the Federal Open Market Committee judged the recent increase in oil and gasoline prices to be temporary, and not likely to push up inflation over the longer term. However, this is a geopolitical and not an economic calculation. In its policy announcement on Tuesday, the FOMC kept the guns holstered and monetary policy unchanged. The VERY extended period remains in place, as does Operation Twist. Gains in global equity markets and a marginal unwind of financial market tensions in Europe contributed to an increase in U.S. Treasury bond yields through the week. The 10-Year Treasury bond yield is now at 2.353 percent, noticeably above its recent near two percent trend line. Industrial production was unchanged in February, held down by flat utility production and a 1.2 percent decline in mining production. Manufacturing output increased by 0.3 percent for the month, following strong gains in December and January. Retail sales increased by 1.1 percent for the month. Strong car sales helped but so did higher gasoline prices. Auto dealer sales were up by 1.9 percent as unit sales hit a 15.1 million unit annual rate, the strongest monthly sales rate since the onset of the Great Recession. Initial claims for unemployment insurance fell by 14,000 for the week ending March 10, to hit 351,000.  This level of initial claims is consistent with payroll job growth in excess of 200,000 per month.

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