Analysts, economists, and market participants were concerned with three things this week, and three things only: inflation, inflation, and inflation.
In a period otherwise heavy with releases of somewhat inscrutable housing data, the dreaded I word kept coming up. Among other things, the experts were busy debating how a housing recovery, a spike in the price of crude, or further actions by the Federal Reserve could play into the economy's price dynamic.
Some pointed to last week's 0.1 percent reading of core consumer price inflation for February -- the lowest increase in five months -- as statistical proof inflation fears are overdone.
Others, like Dean Maki, chief U.S. economist at Barclays Capital, were skeptical. In a note to clients, Maki wrote that the bottom line is that we are unconvinced by the February data that the trend in core inflation has shifted lower.
As Maki explained, the observed slowdown in the rate of price growth was mainly attributable to unusual volatility in the cost of medical services and rent in certain parts of the country, both of which are likely to reverse soon.
Part of the sudden interest in the price index is a view by market participants that it's déjà vu all over again, as the current growth dynamics appear very similar to those seen early last year, before a massive spike in energy prices took the wind out of the economic recovery's sails.
Another spring has brought another gas price surge at the pump, John E. Silvia, chief economist for Wells Fargo, wrote in a note to clients. The most recent surge in the price of crude oil raises questions that seem to have been answered many times over the past 40-plus years: how much do higher oil prices hurt the U.S. economy and is it enough to generate a recession?
Other analysts also weighed in, suggesting a spike in prices was just over the horizon, but ventured to guess how such developments would affect decision-making at the U.S. central bank. Joseph LaVorgna, the chief U.S. economist at Deutsche Bank, summarized the prevailing view in the title of his most recent weekly report, Faster growth, rising inflation, higher rates. He suggested that, as inflation rises beyond the Fed target of 2 percent, monetary policy makers' conditional commitment to keep official interest rates near zero through at least late 2014 is likely to be abandoned.
Perhaps the most significant development suggesting the market is expecting inflation to rise came from investors putting $13 billion into what amounts to a massive bet on inflation Thursday. At an auction of inflation-indexed Treasury bonds, the break-even rate, the number most closely resembling Wall Street's collective expectations for inflation over the next 10 years, rose to 2.49 percent.
Here's a look at how other areas of the economy fared this week:
Housing. Housing indicators were mixed. Housing starts missed expectations, for example, but new building permits handily beat consensus estimates. The advice from the experts: don't believe mixed data, it's being affected by the warm winter.
While the monthly indicators painted a somewhat mixed picture, the housing story remains unchanged, Silvia of Wells Fargo wrote in his weekend email to clients. Unseasonably warm weather during the normally slow winter months likely lifted activity due to the seasonal adjustment process. Consequently, the milder weather likely exacerbated the seasonal effect, thereby lifting sales to higher levels than would normally occur.
Employment. The positive dynamics in the labor market continued. Initial and continuing weekly claims for unemployment payments continued their downward trajectory. Initial claims fell below 350,000 for the first time in nearly four years. Economists are now taking the path of the labor recovery for granted and beginning to focus on the nuances of current job creation, including how new jobs are being distributed by industry and income level.
However, at least one analyst had a contrarian view. David A. Rosenberg, chief economist at Gluskin Sheff + Associates Inc., said the warm weather in January and February -- the warmest in 65 years -- wreaked havoc on all the data, especially housing, employment, and spending. I estimate that over 40 percent of the job gains were weather-related, taking both months into account. To show you how sensitive the seasonal adjustment is, had the March seasonal factor been applied to February's 'raw' data, payrolls would have actually collapsed 400,000 instead of showing a seasonally adjusted increase of over 200,000.
Industrial Strength. The Conference Board's Leading Economic Index, which serves as a first read on the general economy but is heavily weighed toward industrial-production numbers, rose 0.7 percent in February, a lofty increase that was 0.1 percent more than what economists had expected. Orders of consumer products and nondefense capital goods reported by manufacturers did the most to boost the index.