Rising retail sales, weekly wages and inflation point to positive cycle for Fed

By Howard Schneider

WASHINGTON (Reuters) – Weekly wages are rising, American consumers are spending their money and prices are following suit in signs that a continued economic recovery sets the stage for a Federal Reserve rate rise in December and the cycle beyond that, despite concerns over low levels of inflation.

The U.S. core consumer price index, which strips out food and energy prices for a clearer look at underlying inflation, moved higher in October, rising after a sharp drop earlier in the year that had unnerved some U.S. policymakers.

The Fed’s preferred personal consumption expenditures price index has also reversed course, rising to 1.6 percent in September from 1.4 percent in August, and analysts argue it will feed off steady wage and job growth.

Further evidence: retail sales rose a better-than-expected 0.2 percent in October and analysts estimate they may hit 3 percent annual growth for the full year.

Though the rise in inflation nicked a penny off of the average hourly earnings for production and nonsupervisory workers in October, a jump in the length of the work week made their paychecks fatter anyway.

Average weekly earnings rose 2.6 percent for the same group of workers on an annual basis, the strongest increase since June, continuing a trend of rising wage gains under way since 2011.

Taken together the data caused some forecasters to bump up their estimates of economic growth for the year, and firm their expectations for the Fed’s December action.

Inflation “is gaining momentum gradually. The October data show a broadly based improvement,” said advisers from Barclays (LON:) Research. The Fed “will take comfort.”

Macroeconomic Advisers increased its estimate for third-quarter gross domestic product growth to 3.4 percent on the basis of the retail sales figures, and suggested retail sales would continue to grow. It pushed up its fourth-quarter GDP forecast to 2.5 percent.

“We expect strong fundamentals for consumer spending – including continued job gains, firming real wage growth, and the recent strength in household net worth – to support solid gains in retail sales over the coming months,” economist Kathleen Navin wrote.

The Fed has been debating through much of the year whether recent weak inflation was a signal of a developing problem in the economy, or whether low unemployment would eventually mean rising wages and prices moving closer to the Fed’s 2 percent target.

But in general policymakers have held close to the view that as long as job growth and household spending hold up, inflation can’t be far beyond.

If anything, New York Fed president William Dudley said at an earlier New York speech, the lull in inflation may prove a good thing – pushing up real wages and indicating that more people can be employed without price rises getting out of hand.

“It would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation,” Dudley said. “More people could be put to work on a sustainable basis.”

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