There are two key pillars to the Fed’s inflation-fighting campaign, and they’re related.
First and foremost, policy needs to curb demand, which is just a euphemism for discouraging spendthrift Americans from spending. If policy is successful in that regard, businesses won’t need as many workers. Ideally, a reduction in labor demand will manifest in fewer job openings first, and layoffs only later. Fewer job openings means less competition for workers, and less competition for workers means slower pay growth, which in turn reduces the risk of the dreaded wage-price spiral.
In short: Slower demand is key, which is why some analysts are eying this week’s US retail sales report even more closely than the CPI data. “There is reason to believe that consumer spending has reaccelerated to start the year due to full employment, wage growth and warm January weather,” Nomura’s Charlie McElligott said Monday, noting that Mastercard SpendingPulse data showed US retail sales ex-autos rose nearly 9% YoY last month.
“Consumer spending remains resilient in the first few weeks of 2023,” Steve Sadove, a senior advisor to Mastercard and a former Saks CEO remarked, calling the overall retail story “largely positive with January posting a solid month of growth across the country.”
When you think about the role of consumer demand in the inflation equation, note there’s at least one sense in which slower demand is inflationary. “Bloated inventories due to a lack of consumer demand are sustaining upward pressure on warehouse rates,” Lori Ann LaRocco wrote Monday, in an exceedingly rare example of a CNBC article worth reading.
The apparent rise in warehouse prices comes as no surprise: In 2022, America’s largest retailers revealed a massive inventory overhang tied to goods over-ordering in 2021. For at least two quarters, that was the story for retail analysts. Even Walmart was caught offside, forcing the company to cut guidance multiple times.
There’s a tie in with construction. As one VP at a logistics company told LaRocco, “national warehousing capacity remains low and will remain tight for the foreseeable future” given a sharp YoY decline in US industrial construction starts, which the executive attributed to higher rates.
In some (but obviously not all) respects, that’s conceptually similar to the situation that kept housing prices stubbornly elevated in 2022 — America has a structural supply shortage that keeps the market tight.
The lack of warehouse space, LaRocco went on, is spilling over, forcing shippers to incur costs associated with leaving full containers on chassis. There are two related fees, which another VP said could run “to tens of millions of dollars” when considered together.
Guess who’s going to end up absorbing some, and maybe most, of those fees? Well, consumers, of course. Assuming they’re still shopping. If they aren’t, that just means even higher warehouse costs and more fees for shippers.
In the end, somebody has to take a hit. If it’s not consumers’ wallets through higher costs, it’s margins, through discounting to move product. Either way, it’s not a happy ending.
