Inflation Rate Spikes As Retail Workers Quit And Chairman Powell Deflects
Wow, talk about a retail double-whammy headache that turned miserable! First, the workers quit and then the May PCE (personal consumption expenditure) index hit its biggest inflationary increase in 29 years!
The Department of Commerce released their PCE numbers Friday morning and the index hit 3.4% (excluding food and energy) after rising 3.1% in April. Clearly, from the trending index, inflation is at hand - but is it “transitory” as the government says? Federal Reserve Chairman Jerome Powell told a congressional oversight committee that inflation was running higher than anticipated, but it will prove to be temporary. Chairman Powell said that “a pretty substantial part (or perhaps all of the overshoot in inflation) comes from categories that are directly affected by the reopening of the economy.”
When the surging PCE increase was announced, the stock market was probably concerned for about a minute - before it reacted with a yawn. The tepid market response was largely because the inflation number was “anticipated” and the month-to-month increase was not so bad. However, within all the delivered data, they did seem to quietly overlook that consumer spending was flat in May - and that personal income has also declined by 2%. These important numbers remain of concern for retailers, especially when they see a slow down of spending in a rising economy - with new inbound inventory arriving to catch anticipated sales.
The double-whammy headache began when consumers started rolling into retail’s front door - while workers started aggressively rolling out the back. The Labor Department released their April turnover numbers on June 8th and the actual number of “QUITS” in the retail sector topped the “job loser list” with a huge percentage increase. All totaled, about 4 million people quit in April and (of them) 649,000 were employed in retail, which was the largest number for the sector in about 20 years.
Thinking back a few months, wasn’t the Paycheck Protection Program (PPP) supposed to preserve retail jobs during COVID? Now, with reasonable abatement at hand – workers are leaving on their own. Some employees have said that they were challenged by dealing with customers or simply too stressed to continue; while others left their jobs to seek new opportunities because they felt it was time to self-graduate from the retail environment. The troubling punch-line for this issue - is that retail is considered a “bell-weather” industry and one that should be leading America’s recovery from the pandemic. However, the data indicates that retail is still 419,000 jobs behind the (more-normal) April 2019 levels and that is of concern. Some blame the extra unemployment benefits that are considered to be overly generous. But, perhaps in an awkward degree of confirmation, the N.Y. Times commissioned an online research survey that actually showed 52% of those polled wanted the extra benefits to end immediately.
In order to get employment levels up to speed - retailers will need to pay their employees more (which many indicate is a good thing), and it is a reasonable assumption that once basic wages go up - they won’t come down. Couple that with higher inventory costs, and retail America could easily tip the scale towards some more serious inflation. Remember, all this is happening in plain sight, as the government continues to tell everyone that the inflationary condition remains “transitory.” Hopes to the contrary are pinned to data points like the (newly lowered) commodity price of lumber – simply because lower lumber prices are presumed to be a symbol that “all commodity prices” will settle down after a few very minor bumps in the road.
Deflation is interesting to discuss - because it seems so unlikely and could only occur if the value of inflation goes below zero. It’s really hard to imagine any possibility for that theory when we know that our demand right now is exceeding supply – which is causing prices to rise. But, what if the demand has been heightened by the many pandemic months of non-spending, coupled with the extra cash that the Biden Administration has pumped into the system; and what if supply was also limited by the same set of circumstances? Economists tend to look at this scenario and wonder if the cash in the economy is simply of a lesser intrinsic value, and then the overall valuations in the stock market would be out of sync with the actual economy – which could be evident if demand levels off and supply exceeds demand – thus depressing earnings. In that case, the ability for the Fed to make adjustments becomes much harder, and prices will suddenly fall in a dramatic fashion, causing stock markets to tumble.
As an example, it remains extremely difficult in this economy to grit your teeth and pay $1 million for a house that you know is only worth $600,000. With housing supplies limited and mortgage rates artificially low, inflation allows the dollar to buy a lesser property for significantly more cash. In the same scenario, if more homes become available and demand drops along with the value of the dollar - then the $1 million that you just paid - might only be worth $600,000 and that’s essentially deflation - in a nutshell.
Talking with fashion retailers, they clearly indicate that costs are rising at a rapid rate, and they don’t expect prices to drop any time soon. Last year the price of cotton was $.63 per pound and today it’s $.86 per pound (which is 36% higher). Cost of dye stuffs have also increased, and the cost of knitting and weaving raw material has increased as well. The cost of labor is up, the cost of packaging is up, and the cost of shipping is also way up. At fashion retail, it is also difficult to get workers - for a myriad of reasons (plus they are also quitting now - as the data indicates).
No matter how you look at it, the retail double-headache conundrum is in play, and the big-boxes are watching their inventory to sales ratios with a careful eye. Factoring for inflation, larger retailers have to increase their lower cost assortments - just to keep their overall inventory in line with sales - and to fill their space. Smaller retailers are forced to do more with less. And while all this is going on, consumer spending just flattened and that could easily roll backwards – spiking inventory and lowering sales.
The issue extends to the restaurant business as well, where some re-openings have stalled because managers can’t get enough workers. One neighborhood restaurant has delayed reopening until September because they need 45 people to run their mid-size operation and they can’t fill the slots. For restaurants already open, food prices are on the rise and drink sizes have been shrinking - all in an ongoing effort to cover costs. Better restaurants are pushing “steak-for-two” to help mask the price of a steak for one, and martini bars have been forced by savvy customers to raise their martini price to get the regular size glass. In pre-COVID times, a good martini was $15, then it went to $18, and some in the New York’s tony Hamptons have pumped the price up to $22. To top it off, New York’s incredible hot pastrami sandwich at Katz’s Deli is now $24.95 and you have to ask yourself: are these just rising prices, or is our dollar worth less?
The bottom line for the inflation watchers is that prominent Democrat, Harvard Economist, and Former Treasury Secretary Larry Summers is likely correct, and federal officials who could better control the rise of inflation – might want to stop hiding in the “transitory” sand and - like the windowless weatherman – start looking outside! For an hourly employee on a fixed wage, who is not invested in the stock market, everything just costs more right now. Inflation, no matter how you translate it (or try to explain the word) - is a genuine risk to the American economy and it’s hitting hard on main street right now.
A recent quote from Mr. Summers bears revisiting:
“We are printing money, we are creating government bonds, we are borrowing on unprecedented scales (and) those are things that surely create more of a risk of a sharp dollar decline - than we had before.
And - sharp dollar declines are much more likely to translate themselves into inflation than they were historically.”