Twin threats from price inflation and deflation

Although core consumer price pressures remain subdued, food and fuel price inflation represent a growing threat to consumer spending—especially among lower-income households.

In the retail goods sector, the threat is from falling prices as much as rising prices. Deflation in (retail) goods excluding food and fuel worsened in the latest month (-1.0%).

As a result, retailers are particularly vulnerable to a growing threat that lower-income households economize on retail goods to pay for higher food and fuel prices. The immediate outlook—at least through the holiday—should not be hurt dramatically, however (see holiday outlook here).

Here is more on what the latest numbers say about:

  • Overall inflation. After topping 2% through the start of the year, core consumer inflation has slipped to 1.7% for five months in a row through September as measured by the Consumer Price Index—and inflation is even lower as calculated by the PCE measure (+1.3%) tracked by the Federal Reserve Board.
  • The food & fuel threat. The benefit consumers received from lower prices for food and fuel in 2016 continues to be erased—which will squeeze spending in other categories. Food and beverage prices are now up slightly (+0.4%) from a year ago. Energy prices are up more than 10% from a year ago.
  • Other inflation categories. Other relatively high inflation categories pulling spending away from other categories include: rent and house payments (+3.3% yr-to-yr), food away from home/restaurants (+2.4%), education (2.1%), and recreational services (+3.8%).
  • Prescription drugs. Prescription drug prices have subsided as a threat to spending in other categories. These prices fell month-to-month and were up just 1.4% from the prior September.
  • Apparel. Apparel prices remain weak. They slipped lower month-to-month in September and are roughly flat compared with a year ago.
  • Homegoods. Prices for home-related goods remain especially weak—down month-to-month, year-to-year, and year-to-date.
  • The Fed impact. Despite the muted inflation threat outside of food and fuel, expect the Federal Reserve to remain intent on raising interest rates to forestall the threat of future inflation. This means that economic growth will feel all the downside and little of the upside that typically comes from low inflation.

These results are based on MacroSavvy’s analysis of latest Consumer Price Index data from the Bureau of Labor Statistics.

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