"Healthy Consumer" Is An Inflation Illusion

Higher prices are masking a lack of real economic progress

The market is betting that economic or political pressure could prompt a premature Fed pivot that leaves the inflation fight unfinished. While the data support the view that there may be less resiliency in the consumer sector than it first appears, it also suggests that inflation is more persistent than the headlines suggest.

The easier part of the Fed’s job was raising rates while headline inflation was soaring. The harder part will come if rates need to remain elevated as underlying inflation persists in the face of noisy headlines.

The details:

The drop in headline inflation from 9% to 5% has been fueled by noisy outliers. More stable measures (like the Median CPI) show that price pressure has been more persistent.

Even after a 1% decline in March, retail sales are 7% above where they were two years ago. Average weekly earnings have moved sideways the past two months, but are nearly 20% higher than pre-COVID levels.

Strip out the effects of inflation and a dramatically different picture emerges. Real retail sales are where they were two years ago and real average weekly earnings have dropped to where they were nearly four years ago.