The economic narrative for 2023 has centred on lowering inflation and faster-than-expected economic growth preventing a recession in the US. Despite the fact that the economy is dealing with the highest interest rate environment in more than 20 years, this is the case.
But as 2024 draws closer, the stronger-than-anticipated consumer could prevent more encouraging inflation news and could have an impact on how Federal Reserve Chair Jerome Powell frames the Fed’s fight against inflation during his speech on Friday in Jackson Hole, Wyoming.
Since the most recent data increase the risk of a further inflation increase, we believe Powell’s tone at Jackson Hole will be less balanced than the July FOMC minutes. Shruti Mishra, a US and global economist at Bank of America, penned a note on Sunday.
After yet another impressive set of economic data revealed that consumer spending held steady in July, Powell’s speech will follow. The third quarter’s economic growth is currently on course to rise at its strongest rate since the fourth quarter of 2021.
“We see building upside risks for goods prices more broadly as demand for goods is picking up again just at commodity prices have been rising, inventories appear to have reached a peak, and the disinflationary forces from supply chains correcting could be reaching an end,” Citi economist Veronica Clark wrote in a note on Monday.
Consumers are still making purchases, as evidenced by the 0.7% increase in retail sales in July, which also featured a 10.3% increase in nonstore retailer sales over the previous year. Citi economists contend that increased consumer strength could increase the likelihood that inflation will reaccelerate.
Below the headline fall in inflation during the previous few months, a more nuanced story is developing.
The Consumer Price Index (CPI), which measures headline inflation, rose 0.2% month over month in July. It holds true for “core PCE,” which does not include the erratic food and energy categories.
Since core CPI rose at the same time as the Fed’s interest rate, most economists saw this as favourable.
Thomas Simons, a US economist with Jefferies, claims that may not be the complete picture.
According to Simons, the post-pandemic economy has also shown to be very erratic in terms of healthcare services and airfare. Simons’ alternative measure, “super duper core service inflation,” grew at a 0.7% pace in June after adjusting for those variables, the highest month-over-month increase since February.
The robust disinflationary trend that has been in place since last summer can be celebrated by the Fed, according to Simons, who stated this in a note to clients on August 11.
However, it is still way too early to celebrate, and the Fed will be encouraged to keep interest rates high and provide hawkish policy advice by the pressure on the super duper core gauge of inflation.
Gregory Daco, chief economist at EY-Parthenon, recently noted in Yahoo Finance’s Chartbook that inflation might end 2023 higher than it is now if stickiness as Simons’ highlighting plays out and month-over-month inflation picks back up.
The fast decline in energy costs, the slowing of food price inflation, and the relaxing of core goods inflation provided a “free disinflationary lunch,” according to Daco. Therefore, any further disinflationary impetus will have to come from slower month-over-month increases in core services prices.
Even while the labour market may not be as robust as it was during the pandemic, Americans are nonetheless experiencing strong salary growth.
Over the headline inflation rate of 3%, earnings are increasing at a rate of 4.4% from a year earlier, which means that “real” wages, or those adjusted for inflation, are currently expanding for the first time since March 2021.
The average salary that workers are prepared to leave their jobs for has reached an all-time high of $78,645, an increase of 8% over the previous year, according to fresh data from a fresh York Fed study released on Monday.
Simons’s unwilling wage growth results in “We doubt that we will see much relief in [super duper core services inflation] prices until more slack develops in the labour market, and that doesn’t seem to be happening any time soon,” wrote Simons.
“Real wages are positive again when wages are higher than inflation,” Powell stated at a news conference on July 26. “That’s fantastic. We naturally desire that. We want individuals to receive real wages, but we also want wage increases that over time are consistent with 2% inflation. However, I would assert that moving forward, wages are likely to be a significant concern.
In other parts of his news conference, Powell reaffirmed his belief that the labour market is still “very tight,” but he also said that there are some signs of “better balance” beginning to emerge in the US labour market.
We believe that additional easing in labour market conditions is necessary since they will play a significant role in bringing inflation back down, according to Powell.
For Yahoo Finance, Josh Schafer works as a reporter.