- Sept. 19, 2023
-- For most of 2023, investors have got the best of both worlds as it relates to the evolving macroeconomic backdrop – above-trend economic growth supported by a resilient consumer, and still-high but steadily declining inflation. However, more recently, there have been signs that this dynamic is gradually starting to change, as the rally in energy prices is leaving a mark on consumer prices and spending. We'd offer the following perspective on what last week's uptick in headline CPI and slowdown in retail sales mean for the Federal Reserve (Fed) and the markets.Pace of disinflation slows as headline and core CPI move in mixed directions
Consumers remain resilient but are also showing some fatigue
- The headline consumer price index (CPI) rose 0.6% for the month of August, and was up 3.7% from a year ago, an acceleration from July's 3.2% pace. However, the move higher was mostly in line with expectations and was primarily driven by higher energy prices. To this point, gasoline prices rose 10.6%, contributing to more than half of the CPI's monthly gain1.
How big of a threat are rising oil prices?
- Energy prices had a noticeable impact on consumer spending as well. Retail sales rose 0.6% in August compared with July, above the 0.1% rise that was expected, but that was largely due to strength in gasoline sales. Taking out gas, retail sales rose 0.2%, and control sales that feed into the GDP calculation increased only 0.1%, while the July sales were revised lower1.
The labor market is gradually softening
- After averaging $75 for most of the year, WTI crude oil prices reached a 10-month high last week of about $90 a barrel, but they are still well below last year's $123 peak1. The main driver behind the recent surge has been production cuts from Saudi Arabia (the top oil exporter) and Russia, as both countries announced earlier this month that they will maintain the current lowered production through the end of the year.
Fed wants to downshift, but incoming data are in the driver's seat
- Arguably one of the most important pieces of the economic puzzle is the labor market, since job security and income gains are what drive the confidence to spend. Employment conditions remain strong, with the unemployment rate near historic lows and demand for labor exceeding supply.
Source: 1. Bloomberg
- Last week's mixed inflation report does not change the narrative for Fed policy in our view, which the muted reaction in bond yields confirms. Fed officials have indicated that they want to slow down the pace of rate hikes. This is why they will likely look through the higher energy costs for now and keep rates steady at this week's meeting.