As we inch closer to 2024, the economic narrative of the United States continues to evolve, with the spotlight firmly on the nation’s consumer strength. Despite navigating the highest interest rate environment in over two decades, the U.S. economy has managed to skirt a recession, thanks to declining inflation and stronger-than-expected economic growth in 2023. However, the robust consumer spending, which has remained resilient even in July, could hamper further good news on the inflation front, and this may significantly influence Federal Reserve Chair Jerome Powell’s strategy in combating inflation.
In his speech scheduled for Friday in Jackson Hole, Wyo, Powell is expected to address these concerns. According to Shruti Mishra, a Bank of America US and global economist, the tone of Powell’s speech could be less balanced than the July FOMC minutes, given the latest data suggests a risk of a fresh increase in inflation. Economic growth in the third quarter is currently trending towards its fastest pace since the fourth quarter of 2021, and this momentum coupled with rising commodity prices and peaking inventories indicates an increasing risk for goods prices.
Strong Consumer Spending May Impact Inflation Fight
The 2023 economic narrative has largely focused on declining inflation and stronger-than-expected economic growth, allowing the U.S. to avoid a recession despite navigating the highest interest rate environment in over 20 years. However, as we approach 2024, robust consumer spending could impact the inflation landscape and shape Federal Reserve Chair Jerome Powell’s strategy against inflation.
Powell’s Speech and the Consumer Impact
Bank of America US and global economist Shruti Mishra predicts Powell’s tone at the forthcoming Jackson Hole address may be less balanced due to recent data suggesting a possible increase in inflation. Powell’s speech comes after strong July economic data showing resilient consumer spending and economic growth in Q3 tracking towards its quickest pace since Q4 2021.
Rising Goods Prices and Inflation
Citi economist Veronica Clark notes the potential for rising goods prices as demand increases, commodity prices rise, and supply chains appear to have corrected. The 0.7% increase in retail sales in July, including a 10.3% surge in nonstore retailer sales compared to last year, indicates continued consumer spending on goods. This strength in goods consumption could potentially reaccelerate inflation.
Inflationary Pressures and the Labor Market
However, the inflation story is more complex beneath the surface. While headline inflation has decreased over recent months, Jefferies US economist Thomas Simons suggests this might not present the full picture. Removing volatile sectors like healthcare services and airfare, Simons’ alternative gauge of inflation, "super duper core service inflation," increased 0.7% in June, the largest month-over-month increase since February.
Simons argues this pressure will motivate the Fed to maintain high rates and give hawkish policy guidance. Furthermore, EY-Parthenon chief economist Gregory Daco notes if this inflation pattern continues, inflation could end 2023 higher than present levels.
Wage Growth and Inflation
Meanwhile, despite a slower job market, real wages are positive for the first time since March 2021, growing at a 4.4% pace from a year ago, above the headline inflation number of 3%. Additionally, the average wage workers are willing to leave a job for has hit an all-time high of $78,645, up 8% from last year according to a New York Fed survey. Simons believes this stubborn wage growth could contribute to persistent inflation unless the labor market slackens.
In conclusion, the interplay between robust consumer spending, inflation, and wage growth will be critical in shaping the economic landscape as we approach 2024. Powell’s upcoming speech in Jackson Hole will be closely watched for further insights into the Fed’s inflation strategy amidst these complex economic conditions.