The Impact of Rising Inflation and Consumer Sentiment on the Retail Industry

In the past year, inflation and consumer sentiment has increased at a steady rate. After the fed increased a quarter of a percentage point to the target rate of 1.50-1.75 in March 2018, tells us that the Fed worries that the economy is going to be overheated.

It was mentioned at the FOMC meeting that they expected to raise the interest rate for another two times in 2018.

After May 2nd, the Federal Open Market Committee decided to hold the target rates unchanged at 1.5% to 1.75% even though the job market tightened, with a historically low rate of 3.9% since 2000. Household spending has been flat since the end of 2017, the headline inflation and core inflation are in a pace of moving to the Fed's target rate of 2 percent.

However, the fed mentioned the market-based measures of inflation compensation remain low, the wage increase is less than expected. Consumers are still spending less as retail sales have been flat.

On another hand, consumer confidence has been increased steadily in the past few years due to increased economic expansion, with a tightening labor market, consumers feel much more confident in the overall U.S. economic conditions, which signals if there is a rise in their paycheck, they are willing to spend which will potentially benefit the retail industry.

The National Bureau of Economic Research recorded the longest peak to peak; it was 128 month. This expansion has been the second longest. Moreover, it doesn't have a lot of signs of a recession, with the GOP tax cuts and the increasing government spending, the expansion seems will become the longest expansion in the U.S. history. Goldman Sachs forecasted a rate of 90 percent this expansion will break the record if the economic expansion continues to expand after July 2019.

The retail sales in the U.S. increased a 0.6% from February, shows the consumer they haven't really opened their wallet yet, with Trump's tax reform supposed to put more money in American pocket, then they supposed to go out and spend that, and we did not see that yet, there is probably a policy lag, we expected the wage increase would increase in the coming weeks.

In this week, the biggest retail companies will post their reports; those companies include home depot on Tuesday, Macys on Thursday and JCP penny, and we expected a relatively flat sales from them since the wage increase is not enough, and there probably still a mind recession in consumers mind which limited the consumer to really open their wallet, we believe the mind recession will disappear with the increase of the wages in the coming month.

Leave a Comment