US retailers cut prices, but services keep inflation warm

WASHINGTON, June 9 (Reuters) – Major US retailers such as Target Corp (TGT.N) and Walmart Inc (WMT.N) have cut prices to remove overcrowded department stores, but hotel revenues are pouring in as daily room rates and occupancy have broken over pre pandemic levels.

The prices of used cars are no longer rising at top speed, which led to an initial increase in inflation from the covid era; but air fares as of April rose at a stratospheric 33% annual rate.

The price of restaurant meals is accelerating, but without any visible break yet in demand according to data from the reservation site OpenTable.

The Federal Reserve and the Biden administration had thought that the expected rotation of spending from a covid-lockdown leap on goods to personal services would take the edge off price increases. After all, services are less affected by the bottlenecks in the supply chain that kept goods off the shelves and drove up price increases due to scarcity.

Instead, the two sides of US consumption have so far seen a transition in inflationary pressures, with the more wage-sensitive service industry competing for workers to fill vacancies well above the national job opening rate.

For the Fed, as well as Democrats who are worried that inflation will cost them in the midterm polls in November, the “big rotation” so far offers no easy solution.

“An increase in consumption back towards services may not help much,” given higher demand for labor and higher wage growth in the service industry, said Harry Holzer, an economics professor at Georgetown University and a fellow at the Brookings Institution. “Wage growth is stronger in a number of sectors from the low end … to the high end” – from restaurant workers to well-paid professionals.

New consumer inflation data coming in on Friday is expected to show that headline prices rose by 8.3% annually, a price shock over decades that has cut Americans’ purchasing power, increased food costs and pushed gasoline to close to $ 5 per gallon.

The Fed is using a slightly different target for its 2% inflation target, but it is running at 6%, prompting the Fed to construct one of its fastest ever turns towards tighter monetary policy, with President Joe Biden’s blessing in the hope that prices will ease soon.

‘OPTIMISTIC FOR THE CONSUMER’

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Inflation for goods has declined as expected, with falling demand and growing evidence that supply chain problems are improving.

Shipping costs and portage towing are declining, and supply chain indices from both the New York Fed and Oxford Economics fell through May.

Monthly e-commerce data from Adobe, released on Thursday, showed that inflation for goods purchased online fell in May to an annual rate of 2%, down from a peak of 3.6% in March. Prices fell on a monthly basis for 10 of the 18 categories followed up by the company. Rising online prices were a hallmark of the covid commodity stage.

But the services are taking up the slack. Excluding energy-related services, inflation for “core” services has accelerated for eight months in a row, and their share of total inflation has also risen.

So far, it has not clearly reduced consumption, although “real” inflation-adjusted purchases may have fallen slightly, according to a study by the Bank of America Institute of Credit Card Expenditure.

“When we look around the data for bearish signs, we are still hit by strong momentum in the service sector’s spending,” the report said. “In addition, households’ average checking and savings accounts are higher than the pre-pandemic … Overall, we remain cautiously optimistic for the consumer.”

Financial buffers built during the pandemic can complicate efforts to curb inflation, with households still sitting on a few trillion dollars of extra money from transfer payments from the pandemic or spending trimmed during the health crisis.

This firepower can keep consumption going, whether it is meeting higher mortgage payments when interest rates rise or, as Bank of America noted, financing higher pump prices at the expense of things like durable consumer goods where demand was expected to decline anyway.

FAST NOK?

In a presentation at the end of May, Pantheon Macroeconomics’ chief economist Ian Shepherdson presented the case to inflation optimists: A combination of improved supply chains, an expected decline in house price rises, pressure on profits due to rising inventories and lower wage growth could cause the CPI to fall below 3% early next year.

Signs of this, he claimed, could appear in time for the Fed to slow down the current half of interest rate hikes to a quarter of a point by the autumn, and perhaps as soon as the central bank’s July meeting.

“If you built an inflation model from the bottom up, all those variables you would consider would start moving in the right direction,” he said.

But the pace of improvement will matter. Fed officials have said they want compelling, month-on-month evidence that inflation is declining before declining rate hikes. For politicians, $ 5 worth of gas during the summer driving season ahead of midterm congressional elections is painful.

Changes can not happen quickly, wrote Citi economists Veronica Clark and Andrew Hollenhorst.

They see prices continue to rise around 8.3% annually in Friday’s forthcoming report, “with upside risk and a continued rise in service prices. An increase in service inflation will be a further sign that too tight labor markets are a key factor driving high inflation” as may cause the Fed to keep its faster rate hikes intact.

Reporting by Howard Schneider; Edited by Dan Burns, Andrea Ricci and David Gregorio

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