What if January sales and inflation really weren't that hot? Does the Fed recognize it?

A big reason behind the belief that the Federal Reserve will continue its tightening cycle was a huge increase in retail sales for January.

Advance retail sales for the month increased 3%, compared with expectations for a rise of 1.9%, the Commerce Department reported Wednesday. Excluding autos, sales rose 2.3%, according to the report, which is not adjusted for inflation. The ex-autos estimate was for a gain of 0.9%.

Food services and drinking places surged 7.2% to lead all major categories. Motor vehicle and parts dealers increased 5.9%,while furniture and home furnishing stores saw a rise of 4.4%....

“The monthly reports on industrial production, retail sales, and jobs were generally better than expected and point to a pickup in economic activity in early 2023 after a soft patch in late 2022. The Fed will read recent activity reports as supporting plans for additional interest rate increases in the first half of this year,” said Bill Adams, chief economist for Comerica Bank.

Inflation as gauged by the consumer price index accelerated by 0.5% in the first month of the year, the Labor Department announced Tuesday. The sales report indicates that even with elevated inflation pressures, consumers continued to spend.

But much like how I think the January increase in inflation was a one-time bump that has since receded (US gas prices are down 4% compared to a month ago), I think the big increase in retail sales number also is misleading. And the reason why is the old "seasonal adjustment".

In the 2 months before January, retail sales declined on a seasonally-adjusted basis, despite Americans spending more actual dollars over the Holiday shopping season. Conversely, the big boost in January really reflected a lower-than-normal post-Holiday decline.

If you take the last 3 months together, overall retail sales have grown by less than 1% total, and core sales up a little under 1.4%. That's decent, but nowhere near a situation where the economy is overheating and needs to be forcibly slowed down.

But Wall Streeters definitely think we are due for more rate hikes based on this "strong" retail data, and the red-hot jobs market. That would zoom the Fed Funds rate well past 5%, and that recalibration led to a 4% decline in the DOW Jones Industrial Average for February, giving back all of the gains from January.

I just wonder how the reaction will be when February comes back to the norm for both inflation, and likely retail sales. And will the Fed recognize that the inflation and shortages of 2022 aren't coming back, and stop tightening before the economy truly does get hurt from a misreading of the current economic situation?