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Friday, June 10, 2022
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In recent weeks, retailers ranging from Target (TGT) to Gap (GPS) and Kohl’s (KSS) have admitted they’ve loaded up with too many goods that consumers no longer want.
And while the Fed is looking for lower prices to slow inflation, apparel sales alone won’t be enough.
On Friday morning, the BLS will release the consumer price index for May. Heading into print, economists expect headline inflation to have risen 8.3% from a year ago, a rate that remains near 40-year highs.
Retailers’ woes have spooked markets and bolstered some arguments that the economic recovery is starting to show cracks. Discounts to browse bloated inventory have been announced by some retailers and seem increasingly likely for others.
But don’t expect retail markdowns to make a dent in inflation.
“If someone tells you that recent news that some retailers are offering discounted clothing will have a measurable effect on the 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 above 5%.”
In other words, even if clothing were entirely removed from the CPI calculation, due to its 2.5% weight in the index, headline inflation would still be above 5%. Put simply, Colas is simply noting that cheaper clothes won’t do much to bring inflation back toward the Fed’s 2% target.
For personal consumption expenditure (PCE) – the Fed’s favorite inflation indicator – the “clothing and footwear” category maintained a slightly higher weight at 2.9% during the first quarter.
In the CPI, the component weights, or “relative importance,” roughly correspond to the estimated changes in consumer spending between categories as prices change. The much larger contributors to headline inflation are therefore the goods and services that create the greatest changes in consumer behavior.
And as consumers shift their spending toward experiences and services rather than goods, clothing has become even less of a driver of consumer habits, posing another inflation problem for the Fed.
“We have seen real spending on clothing and footwear stabilize over the past 12 months. There has been some accumulation of apparel inventories at the wholesale level and generally the dollar exchange rate has strengthened. So some decline in apparel prices was inevitable,” Neil Dutta, head of US economics at Renaissance Macro Research, said in an email.
“This is part of a larger story about changing consumer preferences as the economy reopens and in-person service activities resume.”
Meanwhile, energy, which accounts for 8.3% of the overall CPI, has become a particularly big issue for consumers. More than half of the energy impact is at the pump, with gasoline expenditure alone representing a weight of 4.6% in the calculation of the overall CPI.
Rising gasoline prices accounted for a growing share of spending by low-income households, in particular, Bank of America economists showed in a report this week. It comes as some data showed the average price of a gallon of gasoline topped $5 in the United States for the first time this week.
And like Bloomberg’s Joe Weisenthal Noted yesterday, gasoline prices also became a political challenge. A chart of President Joe Biden’s approval ratings and gasoline prices has plotted an inverse relationship year to date.
“Food and fuel are the two CPI categories that consumers buy most regularly and are therefore logical bases for [consumers] to assess inflationary pressures,” noted Colas of DataTrek.
And the arguments for both staying high are still compelling. The summer travel season is in full swing, pushing energy prices higher, while Russia’s ongoing war in Ukraine is putting upward pressure on agricultural commodities.
So until price cuts extend well beyond retailers, the Fed’s goals of reducing inflation look set to remain a stubborn and ongoing challenge.
What to watch today
8:30 a.m. ET: Consumer price index, month-over-monthMay (0.7% expected, 0.3% in previous month)
8:30 a.m. ET: Basic CPI, month after monthMay (0.5% expected, 0.6% in previous month)
8:30 a.m. ET: Consumer price index, year over yearMay (8.3% expected, 8.3% in previous month)
8:30 a.m. ET: Core CPI, year over yearMay (5.9% expected, 6.2% in previous month)
8:30 a.m. ET: Actual average hourly earningsyear-over-year, May (-2.6% in the prior month)
8:30 a.m. ET: Real Average Weekly Earningsyear-over-year, May (-3.4% in the previous month)
10:00 a.m. ET: University of Michigan Sentiment, June Preliminary (58.7 expected, 58.4 in previous month)
2:00 p.m. ET: Monthly budget statementMay ($308.2 billion in previous month)
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