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Summer sales won’t fix Washington’s inflation problem

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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 am ET. Subscribe

Friday, June 10, 2022

Today’s newsletter is by Emily McCormicka reporter for Yahoo Finance. Follow her on Twitter.

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

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

On Friday morning, the BLS will release the Consumer Price Index for May. Heading into the print, economists expect headline inflation rose 8.3% over last year, a rate that remains near 40-year highs.

Retailers’ woes have spooked markets and bolstered some arguments the economic recovery is starting to show cracks. Discounts to move through swollen inventories have been announced by some retailers, and appear increasingly likely for others.

But don’t expect retail markdowns to make a dent in inflation.

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

In other words, even if apparel was completely removed from the CPI calculation, because of its 2.5% weight in the index, headline inflation would still be over 5%. In plain English, Colas is simply noting that cheaper apparel won’t really help bring inflation back toward the Fed’s 2% target.

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

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

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

And as consumers shift spending towards experiences and services over goods, apparel has become even less of a driver of consumer habits – posing yet another inflation challenge for the Fed.

“We’ve seen real spending on clothing and footwear flatten out over the last 12 months. There has been some build up of inventories for clothing at the wholesale level and generally speaking, the dollar exchange rate has strengthened. Thus, some decline in apparel prices was inevitable, ”Neil Dutta, head of US economics at Renaissance Macro Research, said in an email.

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

Meanwhile, energy, which comprises 8.3% of the CPI headline, has become a particularly salient issue to consumers. More than half of the energy impact is at the pump, with gasoline spending alone holding a 4.6% weight in the all-item CPI calculation.

Higher gas prices have made up an increasing share of spending for lower-income households especially, Bank of America economists showed in a report this week. This comes as some data showed the average price of a gallon of gas topped $ 5 in the US for the first time ever this week.

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And as Bloomberg’s Joe Weisenthal noted yesterday, gas prices have become a political challenge as well. A graph of President Joe Biden’s approval rating and gas prices has charted an inverse relationship since the start of the year.

“Food and fuel are the two CPI categories consumers purchase most regularly and therefore are logical baselines for [consumers] to assess inflationary pressures, ”DataTrek’s Colas noted.

And the arguments for both to stay elevated are still compelling. The summer travel season is in full swing, pushing energy prices higher, while the rising war in Ukraine is exerting upward pressure on agricultural commodities.

So until price cuts extend well beyond retailers, the Fed’s goals of bringing down inflation appear set to remain a stubborn, ongoing challenge.

What to Watch Today

Economy

  • 8:30 am ET: Consumer Price Index, month-over-monthMay (0.7% expected, 0.3% during prior month)

  • 8:30 am ET: Core CPI, month-over-monthMay (0.5% expected, 0.6% during prior month)

  • 8:30 am ET: Consumer Price Index, year-over-yearMay (8.3% expected, 8.3% in during prior month)

  • 8:30 am ET: Core CPI, year-over-yearMay (5.9% expected, 6.2% during prior month)

  • 8:30 am ET: Real Average Hourly Earningsyear-over-year, May (-2.6% during prior month)

  • 8:30 am ET: Real Average Weekly Earningsyear-over-year, May (-3.4% during prior month)

  • 10:00 am ET: University of Michigan Sentiment, June preliminary (58.7 expected, 58.4 during prior month)

  • 2:00 pm ET: Monthly Budget StatementMay ($ 308.2 billion during prior month)

Earnings

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