Summer Sales Won’t Solve Washington’s Inflation Problem

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Friday, June 10, 2022

Today’s newsletter is from Emily McCormickYahoo Finance reporter. Follow her on Twitter.

In recent weeks, retailers ranging from Target (TGT) to Gap (GPS) and Kohl’s (KSS) have admitted they carry too many products that consumers no longer want.

And while the Fed is looking for lower prices to slow inflation, clothing sales alone won’t cut it.

On Friday morning, the BLS will release the May Consumer Price Index. Going to print, economists expect global inflation to have risen 8.3% from last year, a rate that remains close to 40-year highs.

Retailers’ woes have spooked markets and reinforced some arguments that the economic recovery is starting to show cracks. Discounts for moving bloated inventories have been announced by some retailers and look increasingly likely to others.

But don’t expect retail markdowns to affect inflation.

“If someone tells you recent news that some retailers are discounting clothing will have any measurable effect on CPI, ignore them,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note Thursday. “Retailers could give away clothes for free and US inflation would still be over 5%.”

That is, even if clothing were completely removed from the CPI calculation, due to its 2.5% weight in the index, full inflation would still be above 5%. In plain language, Colas is simply noting that cheaper clothes are not really going to help bring inflation back to the Fed’s 2% target.

For personal consumption expenditures (PCE) – the Fed’s preferred indicator of inflation – the “apparel and footwear” category maintained a slightly higher weight of 2.9% during the first quarter.

Florida, Orlando Vineland Premium Outlets, J. Crew store with 60% off children’s clothing. (Photo by: Jeffrey Greenberg/UCG/Universal Images Group via Getty Images)

In the CPI, the component weights, or “relative importance”, roughly correspond to the estimated changes in consumer spending across categories as prices change. The very biggest contributors to headline inflation, then, are the goods and services that create the biggest changes in consumer behavior.

And as consumers shift spending to experiences and services rather than goods, apparel has become even less of a driver of spending habits — posing yet another inflation challenge for the Fed.

“We’ve seen real spending on clothing and footwear level off over the last 12 months. There was some accumulation of wholesale apparel inventories and, in general, the dollar rate strengthened. So some decline in apparel prices was inevitable,” Neil Dutta, head of US economics at Renaissance Macro Research, said via email.

“This fits into a broader story about changing consumer preferences as the economy reopens and in-person service activities revive.”

Meanwhile, energy, which accounts for 8.3% of the CPI, has become an especially important issue for consumers. More than half of the energy impact is at the pump, with gasoline spending alone holding a 4.6% weight in the CPI calculation of all items.

Higher gas prices represent a growing share of spending by low-income households, especially, economists at Bank of America showed in a report this week. This comes as some data showed the average price of a gallon of gasoline topped $5 in the US for the first time this week.

And like Bloomberg’s Joe Weisenthal noticed yesterday, gas prices also became a political challenge. A graph of President Joe Biden’s approval rating and gas prices showed an inverse relationship from the start of the year.

“Food and fuel are the two CPI categories that consumers buy most regularly and are therefore logical baselines for [consumers] to gauge inflationary pressures,” noted Colas of DataTrek.

And the arguments for both remaining elevated are still compelling. The summer travel season is in full swing, pushing up energy prices, while Russia’s ongoing war in Ukraine is putting upward pressure on agricultural commodities.

So until the price cuts extend far beyond retailers, the Fed’s goals of reducing inflation look set to remain a persistent and persistent challenge.

what to watch today

Economy

  • 8:30 am ET: Consumer Price Index, month by monthMay (0.7% expected, 0.3% in the previous month)

  • 8:30 am ET: main CPI, month to monthMay (0.5% expected, 0.6% the previous month)

  • 8:30 am ET: Consumer Price Index, year by yearMay (8.3% expected, 8.3% the previous month)

  • 8:30 am ET: Core CPI, year by yearMay (5.9% expected, 6.2% the previous month)

  • 8:30 am ET: Actual average hourly earningsyear on year, May (-2.6% in the previous month)

  • 8:30 am ET: Actual average weekly earningsyear on year, May (-3.4% in the previous month)

  • 10:00 am ET: University of Michigan sentiment, June preliminary (58.7 expected, 58.4 during the previous month)

  • 14:00 ET: Monthly budget statementMay ($308.2 billion during the previous month)

earnings

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