US retailers slash prices but services keep inflation high

WASHINGTON, June 9 (Reuters) – Major U.S. retailers like Target Corp (TGT.N) and Walmart Inc (WMT.N) have slashed prices to clean up overcrowded warehouses, but hotel revenue is surging as daily room rates and occupation have broken above pre-pandemic levels.

Used car prices are no longer rising at the breakneck pace that drove an initial spike in COVID-era inflation; but airline fares in April were rising at a stratospheric annual rate of 33%.

The price of restaurant meals is accelerating, but with no apparent break still in demand according to data from the reservation site OpenTable.

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The Federal Reserve and the Biden administration thought the expected rotation of spending from a COVID lockdown spree on goods to in-person services would dampen price increases. Services, after all, are less affected by the supply chain bottlenecks that have kept goods off the shelves and fueled rising prices due to scarcity.

Instead, both sides of U.S. consumer spending are seeing a transfer of inflationary pressure so far, with the more wage-sensitive service industry vying for workers to fill vacancies well above the rate. national job opening.

For the Fed, as well as Democrats worried about inflation costing them in November’s midterm polls, the “big spin” so far offers no easy solution.

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“An increase in consumption towards services may not help much,” given higher labor demand and higher wage growth in the service sector, said Harry Holzer, professor in Economics at Georgetown University and Fellow of the Brookings Institution. “Wage inflation there is higher in a range of sectors from low-end… to high-end” – from restaurant workers to well-paid professionals.

New consumer inflation data due Friday is expected to show overall prices have risen 8.3% a year, a decades-long price shock that has reduced Americans’ purchasing power, driving up food costs and pushing gasoline to nearly $5 a gallon.

The Fed uses a slightly different measure for its 2% inflation target, but it works at 6%, which forces the Fed to engineer one of its fastest shifts to tighter monetary policy, with the blessing of President Joe Biden in the hope that prices will come down soon. .

‘OPTIMISTIC FOR THE CONSUMER’

In the title number, the subtext may be more distracting.

Goods inflation eased as expected, with falling demand and growing evidence that supply chain issues are improving.

Shipping costs and port backlogs are falling, and supply chain indices from the New York Fed and Oxford Economics have eased through May.

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Adobe’s monthly e-commerce data, released on Thursday, showed inflation for goods purchased online eased in May to an annual rate of 2% from a peak of 3.6% in March. Prices fell month over month for 10 of the 18 categories tracked by the company. Rising prices online were a feature of the COVID product frenzy.

But services take over. Excluding energy-related services, inflation in “basic” services accelerated for eight consecutive months, and their share in headline inflation also increased.

So far, that hasn’t clearly weighed on consumer spending, though “real” inflation-adjusted purchases may have edged down, according to a Bank of America Institute study on spending. by credit card.

“As we look for bearish signs around the data, we are still struck by the strong momentum in service sector spending,” the report said. “Additionally, median household checking and savings accounts are higher than before the pandemic…Overall, we remain cautiously optimistic for the consumer.”

Financial buffers built during the pandemic may complicate efforts to rein in inflation, with households still sitting, by some estimates, on a few trillions of dollars in extra cash from pandemic-era transfer payments or reduced spending during the health crisis.

That firepower could keep consumption going, whether it’s coping with higher mortgage payments as interest rates rise or, as Bank of America noted, financing demand prices. pumps higher at the expense of things like consumer durables where demand is expected to decline anyway.

QUITE FAST?

In a presentation in late May, Pantheon Macroeconomics chief economist Ian Shepherdson laid out the case for inflation optimists: a combination of improving supply chains, an expected slowdown in inflation house prices, pressure on profits from rising inventories and slower wage growth could lead to CPI expected to fall below 3% early next year .

Signs of that, he argued, could emerge in time for the Fed to slow its current pace of rate hikes by half a point to a quarter point by this fall, and possibly as soon as possible. the July central bank meeting.

“If you were building a bottom-up model of inflation, all of these variables that you would take into account start moving in the right direction,” he said.

But the pace of improvement will matter. Fed officials said they wanted inflation to ease month-over-month before slowing rate hikes. For politicians, $5 gas during the summer driving season before the midterm congressional elections is painful.

Change may not happen quickly, wrote Citi economists Veronica Clark and Andrew Hollenhorst.

They see prices continuing to rise by around 8.3% annually in Friday’s next report, “with upside risks and a continued recovery in services prices. A recovery in services inflation would be a further sign that overly tight labor markets are a key driver of high inflation” that could prompt the Fed to keep its faster rate hikes intact.

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

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