‘Upside Risks’ To Inflation Are Increasing As A Result Of The Robust Us Economy: The economic narrative for 2023 has centred on declining inflation and faster-than-anticipated economic growth preventing a U.S. recession. This is true despite the fact that the economy is experiencing the highest interest rate environment in more than 20 years.
As 2024 approaches, however, the stronger-than-expected consumer could prevent more encouraging inflation news and influence how Federal Reserve Chair Jerome Powell portrays the Fed’s fight against inflation in his speech on Friday in Jackson Hole, Wyoming.
Shruti Mishra, a Bank of America US and global economist, wrote in a note on Sunday, “We believe Powell’s tone at Jackson Hole will be less balanced than in the FOMC minutes from July, as the latest data raise the risk of a fresh increase in inflation.”
‘Upside Risks’ To Inflation Are Increasing As A Result Of The Robust
Powell’s address follows another set of positive economic data indicating that consumer spending in July remained resilient. The projected economic expansion for the third quarter will be the quickest since the fourth quarter of 2021.
Citi economist Veronica Clark wrote on Monday, “We see building upside risks for goods prices more broadly as demand for goods is picking up just as 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.”
The 0.7% increase in retail sales in July, which included a 10.3% increase in sales at nonstore retailers, demonstrated that consumers are still purchasing goods. Citi economists believe that increased consumption of products could increase the probability of inflation reaccelerating.
Inflation has declined over the past few months, but a more complex story has been unfolding beneath the surface. Inflation as measured by the Consumer Price Index (CPI) rose 0.2% month-over-month in July. The same holds true for “core PCE,” which excludes volatile commodities like food and energy.
The core CPI rose at the weakest rate since October 2021, which was viewed positively by economists. However, according to Thomas Simons, an economist at Jefferies in the United States, this may not be the comprehensive picture.
In the post-pandemic economy, healthcare services and airline reservations have been especially volatile, according to Simons. Simons’ alternative metric, “super duper core service inflation,” grew at a 0.7% rate in June, the greatest month-over-month increase since February, when these measurements are excluded.
Simons wrote in an August 11 letter to clients, “The Fed can exhale a little and celebrate the strong disinflationary trend that has been in place since last summer.”
“However, it is still far too early for a victory lap, and this pressure in the super duper core measure of inflation will motivate the Fed to continue to maintain high interest rates and provide hawkish policy guidance.”
Gregory Daco, chief economist at EY-Parthenon, recently stated on Yahoo Finance’s Chartbook that if stickiness like Simons’ highlighting plays out and month-over-month inflation increases again, inflation could end 2023 at a higher level than it is currently.
“The ‘free disinflationary lunch’ provided by rapidly falling energy prices, cooling food price inflation, and easing core goods inflation is now over, and any additional disinflationary momentum will have to come from slower month-over-month gains in core services prices,” Daco added.
Uncertainty in the Labour Market
Despite the fact that the post-pandemic labour market is no longer flourishing, Americans are experiencing significant wage increases.
The fact that wages are increasing at a faster rate than the headline inflation rate of 3% indicates that “real” wages, or those adjusted for inflation, are now positive for the first time since March of 2021.
In addition, a study released by the New York Fed on Monday reveals that the average wage for which workers are willing to abandon their jobs is now $78,645, an all-time high and an increase of 8% over the previous year.
Persistent wage growth means for Simons Simons wrote, “We doubt we will see much relief in [super duper core services inflation] prices until more slack develops in the labour market, which does not appear imminent.”
Powell stated at a press conference on July 26 that “wages exceeding inflation means real wages are once again positive.” “That is a wonderful occurrence. Obviously, we desire that. We want people to receive real wages, but we also want wages to increase at a rate consistent with 2% inflation over time… However, I believe wages will be a significant issue in the future.”
During his press conference, Powell reaffirmed his view that the labour market remained “very tight,” but he hinted that indications of “better balance” are emerging in the US labour market.
