Inflation, retail sales face same chill that jobs growth did
The pace of hiring in the U.S. backed off in March after strong gains in the first two months of the year. Now the same thing could happen to inflation and retail sales.
A trio of tools the government uses to measure the cost of living for American households are forecast to decline or remain flat in March. The reason: a sharp drop in the price of oil.
An uptick in energy prices during the winter had been pushing U.S. inflation steadily higher, eliciting fresh worries at the Federal Reserve. The yearly increase in the cost of goods and services as measured by the Fed’s preferred gauge known as the PCE index topped 2% last month for the first time in five years.
It’s not just oil, either.
Inflation is higher than it’s been in a long time even if energy is stripped out. Americans are paying more for staples such as rent, new housing, and airline fares. The cost of services such as medical care, financial advice, insurance and dining out are also higher.
As a result, most economists don’t expect a big dropoff in inflation even if the cost of oil, gasoline and other forms of energy remain stable.
Still, it’s quite a stretch to argue that 2% inflation has suddenly become a danger, especially with rents beginning to ease and gas prices holding the line.
“Inflation pressures remain fairly tame,” said Richard Moody, chief economist at Regions Financial.
The Federal Reserve, for its part, now has to chew over the temporary slowdown in job creation and a potential pause in inflation before it determines when to raise interest rates again. The bank has raised the cost of borrowing in the U.S. twice since December as part of an effort to make sure the economy doesn’t overheat and ignite a unwanted bout of inflation.
Chairwoman Janet Yellen might offer some clues on the Fed’s thinking in an appearance Monday at the University of Michigan’s Gerald R. Ford school of public policy.
The Fed is keeping a particularly close eye on the labor market’s influence on inflation even though it has long been dormant. Hourly wages for the average American worker are up 2.7% in the past 12 months, well above the 2% rate that prevailed through much of the current eight-year-old recovery.
More and more companies say it’s hard to find skilled workers to fill job openings across the nation that are now near a record high. If they have to keep raising wages, it could put more pressure on labor costs and eventually feed into broader U.S. inflation.
So far it hasn’t happened.
Part of what’s keeping inflation in check despite pockets of upward pressure is the inability of companies to raise prices. Competition in the U.S. and globally is stiff, and consumers are more price conscious in the aftermath of the Great Recession.
“We are still hearing from many companies that they are reluctant or unable to raise prices,” said Kate Warne, investment strategist at the brokerage Edward Jones.
The eagerness of consumers to seek out the best deals and prices is playing out most visibly in the retail industry. Sales have increasingly shifted to online stores and away from traditional brick-and-mortar firms.
In March and February, the retail industry shed more than 60,000 jobs, government data showed. That’s the worst two-month period since the tail end of the 2007-2009 recession.
The distress faced by old-style retailers isn’t quite as obvious in monthly retail sales, though. What stores such as Macy’s (M) and Sears (SHLD) lose in sales is largely gained by Amazon (AMZN) and eBay (EBAY)
In March, U.S. retail sales are forecast to be flat. The good news is that consumers didn’t have to spend as much on gasoline as prices fell. The downside is that purchases of new cars and trucks appear to be leveling off after years of soaring sales.
If that’s the case, the auto industry won’t rev up the economy as much as it has earlier in the economic expansion.
That about sums up a U.S. economy whose growth rate has fallen well short of prior recoveries even as it gets closer to a record for the longest expansion ever. It’s been darn near impossible to get every major part of the economy firing on all cylinders at the same time.