We’ve been able to celebrate at the gas pump with those prices falling to some degree. But inflationary concerns continue and the Fed is getting ready to raise rates again.
Jill Schlesinger, CBS News business analyst and host of “Jill on Money, describes the current inflation situation as “rough.”
“We got that inflation report out last week and the news was marginally better from the big picture,” Schlesinger told WCCO’s Vineeta Sawkar. “But, most of the reduction in the headline, CPI Report, came from gas prices going down. Good news, right? And we'll take good news all the time. However, under the hood of this report, there were some areas of concern.”
Food prices continue to accelerate and the cost of housing has gone up. Schlesinger says that just about everything is more expensive now except energy.
All signs now point to the Fed raising interest rates again.
“That probably means that the Federal Reserve is going to be quite aggressive when they meet this week,” Schlesinger predicts. “I think they were expecting an interest rate hike of three quarters of 1%. What's interesting about that is, you know, just a few meetings ago, if I said .75% increase in the Fed Funds Rate, people would have been like, ‘Oh my God, that's crazy, that hasn't happened since 1994’. And now we're about to have our third consecutive three quarter of a percentage point increase. So inflation a big concern for the Fed and for all.”
And what does Wall Street think of all this? According the Schlesinger, not much.
“Look, the problem among investors is they can't quite suss out how the Fed is going to navigate a rate hike campaign without throwing the economy into a recession,” Schlesinger adds. “And there are a lot of factors here. The Fed has this blunt instrument called interest rate hikes. It has a lagging effect. Chances are they'll go beyond what is necessary, but they won't know that until things are not doing so well. So I think that investors are worried that interest rates going up could cause a recession and they're also concerned that if prices do remain high, that consumers are going to pull back on their spending in that all important fourth quarter.”
Schlesinger says it is too early to know what this means for fourth quarter spending, when retailers depend heavily on holiday shopping.
“It's hard to say,” Schlesinger tells WCCO. “I guess if we were reading a textbook, here's how the textbook would go. It would say, ‘well, the price of everything is up then, if human beings are rational spenders and actors in the economy, they will not open their wallets in such a pronounced way around the holidays’. Right? They just won't, but that's not how we are. We are not rational when it comes to money. And I think a lot of people feel like this is going to be the very first holiday season where we are going to be able to gather with our families, kind of freely, and if that's the case, people might be spending more than maybe they should.”
Schlesinger adds that we have to be realistic and she says the economic impact of this is just a piece of a bigger social pie.
“We've come through this horrible two and a half years, almost three years, and people want to feel good again,” she says. “And one way you feel good sometimes is spending. So I'm not as dour about how the consumer spending numbers are going to be for the fourth quarter. I have faith in the American consumer.”
With two major retailers based in Twin Cities, Best Buy and Target, many locally in the business community will be watching consumer spending very closely to see if people are opening their wallets for the holiday season. Schlesinger says companies of that magnitude probably are already prepared for what is coming.
“Those organizations probably can tell us more about the economy than anyone else,” Schlesinger tells WCCO. “So throw the economists out and let's get the retailers in. There are places where, if you really consider a place like Target, you say that's a broad base of spending, right? Because you can buy everything from suntan lotion to clothing to some small appliance. I think would be interesting to find out from them is where people are spending because if we see that they're only spending on essentials, I think that's bad news for the economy. But if there's broad based spending around all the categories, I think then the consumer might be in better shape than we fear.”
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Obviously this week's Fed meeting is going to be quite important followed by the market's reaction to it as well. Schlesinger says that will set up what happens the rest of the year.
“And then we're going to start talking about tallying up how the third quarter was and what the initial reading is on the growth level in the third quarter,” she said. “Remember, we had two quarters where the economy actually shrunk and it's going to be interesting to see whether those numbers are revised. It's also interesting, we’re going to see how the labor market is holding up and I think those are the two most important things. So the economic growth labor market, Federal Reserve. Lots to keep track of.”
Jill Schlesinger is a Business Analyst for CBS News and host of “Jill on Money” which can be heard Saturday nights at 9:00 p.m. on News Talk 830 WCCO.
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