Unusual Retail Sales Report May Be Low-CPI Set-Up. Seasonally-adjusted February retail sales were reported down by 0.56% (down 0.71% net of revisions) +/- 0.6%, this morning, by the Census Bureau. Such was against a revised 0.4% (previously 0.3%) gain in January. Year-to-year change was a 2.6% gain in February versus a revised 4.0% (was 3.9%) increase in January. Net of inflation, both month-to-month and year-to-year changes continue to deepen in negative territory, a classic condition seen during recessions.

Monthly Core Retail Sales Down 0.55%. The February retail sales report showed unbelievable, but small declines in both food and gasoline sales, suggestive of some coming manipulation of the CPI inflation data. It is possible that higher gasoline prices may be beginning to reduce driving activity, but people still will eat. That said, consistent with the Federal Reserve’s predilection for ignoring food and energy prices, "core" retail sales — retail sales net of grocery store and gasoline station revenues — fell by 0.55% (a decline of 0.76% net of revisions) for the month, after rising by a revised 0.15% (previously 0.11%) in January.

Federal Budget Deficit Widened Sharply. Foreshadowing increasingly abysmal fiscal results for the U.S. government, the budget deficit for February 2008 widened to $175.6 billion against $120.0 billion in February 2007. On a 12-month rolling basis through February 2008, that means that the preceding 12-month deficit now has widened to $263.9 billion versus $192.7 billion in February 2007.

Retail Sales Report Suggests Some Downside Reporting Risk to February CPI Expectations. With both gasoline and food sales off in February retail sales reporting, tomorrow’s February CPI report (Friday, March 14th) may be at some risk of a set-up downside surprise against consensus expectations of roughly 0.3%. Underlying fundamentals otherwise still suggest upside risk. Again, any monthly change above or below a 0.17% gain will add directly to or subtract from the 4.28% annual CPI inflation seen in January. As has recently been the case, market displacements are such that political/financial-market manipulations can bring in any CPI number the Administration or Fed would like.

Ongoing market turmoil and systemic shocks remain within the general outlook, which is unchanged. Barring a major surprise in the CPI or other unusual developments, the next communication should be the full newsletter, due for posting on Monday, March 17th or before. More complete analyses follow in that newsletter.