Implications: Today's report on retail sales was lukewarm. Sales increased less than the consensus expected and were revised down slightly for prior months. However, the modest growth in sales in January was primarily due to one category – building materials – which was held down by the unusually harsh winter weather in much of the country. Most major categories of sales increased in January. Despite this, "core" sales, which exclude autos, gas, and building materials (all of which are volatile from month to month) increased a healthy 0.4% and were up for the 15th time in the last 18 months. We expect consumer spending to continue to move higher. Worker earnings are up, consumer debt has stabilized at much lower levels, and consumers' financial obligations are now the smallest share of income since the mid-1990s. In other news this morning, the Empire State Index, a measure of manufacturing activity in New York, increased to +15.4 in February from +11.9. On the inflation front, import prices increased 1.5% in January and are up 5.3% in the past year. Excluding petroleum, import prices increased 1.1% in January and are up 3.2% versus a year ago. Export prices rose 1.2% in January and are up 6.8% in the past year. Excluding farm products, export prices still gained 0.9% in January and are up 5.3% from a year ago. These widespread gains in trade prices are a leading sign of higher inflation that will ultimately hit the US consumer.
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