Prices, spending and confidence — it’s the consumer in focus for investors and the Federal Reserve in the week ahead.
First up is Monday’s report on consumer inflation. The August data are likely to show price hikes have cooled for the second month in a row, primarily thanks to lower gasoline prices. Still, people continue feeling the pinch of higher prices compared to a year ago. And cooler energy prices may be masking hotter inflationary trends continuing to burn away at consumers’ spending power.
The Federal Reserve Bank of Cleveland calculates an inflation rate that focuses on categories that are less volatile each month. It gives a cleaner picture of the underlying price pressures and their sustainability. In July, the official Consumer Price Index showed no change in inflation from a month earlier. However, the Cleveland Fed’s measurement had median inflation moving up another half percentage point.
“Median inflation is a statistically better measure of the underlying inflation that policy makers can actually control,” former White House Council of Economic Advisers Chairman Jason Furman wrote last week in the Wall Street Journal. This is why central bankers will not be swayed by a “good print” on the CPI this week. The headline inflation data shouldn’t deter the Fed from continuing to aggressively raise interest rates when it meets again next week, and investors shouldn’t be lulled into a sense of complacency.
Consumers certainly aren’t. Retail sales have been decent as pump prices fall, even though their dollars are buying less thanks to inflation eroding purchasing power. The strong job market, wage increases, and bloated retailer inventories have helped blunt the impact of inflation. This August retail sales data will be released on Thursday. Past interest rate hikes have yet to meaningfully cool consumer appetites. That gives the Fed more room to hike borrowing costs in its effort to tame inflation.
Consumers have been growing more confident, too, especially about future inflation. The University of Michigan Consumer Sentiment survey for August is due on Friday. After falling to its lowest level since the Great Recession earlier this summer, consumer expectations have been brightening. Further consumer optimism supports an aggressive Fed.
This week’s economic data should cement investor expectations for another sizable Fed interest rate hike in the following week.
