The markets continued an uneasy climb Wednesday morning with the news that Walmart and Target managed to beat Wall Street’s third-quarter earnings estimates. Shoppers have turned to discount retailers in the face of inflation, using their savings to absorb higher prices. Analysts note that the current market is bizarre, with historically low retail worker numbers but record retail profits.
Customers are still spending, according to Reuters. In October, retail shoppers posted 1.7% spending growth month-over-month, suggesting that the holiday spending cycle has already arrived. Manufacturers kept up the pace, too, growing production in October to the highest levels since March of 2020.
All of this is taking place as prices in the shipping industry remain stubbornly high. Bottlenecks in the supply chain have been a thorn in the retail sector’s side, depressing the supply of new cars, appliances, and other consumer goods. Higher shipping costs are passing to consumers, but shoppers are still paying. Demand is higher than ever among retailers and customers alike. What does this mean for the stock market and the US economy? Is inflation only going to get worse, or are there brighter days ahead?
US Federal Reserve Chairman Jerome Powell has described the current pattern of inflation as transitory. According to the government’s fiscal policy experts, the dollar’s value will rise as the economy recovers. The Fed’s loose monetary policy throughout 2020 and most of 2021 kept the dollar supply high. This strategy kept the economy afloat through a lean period. But, it also resulted in Americans deferring purchases and bolstering their savings.
Now that the Fed is tapering its bond-buying program, Powell expects inflation to cool off. The Fed possesses another lever if it wants to use it: interest rates. Higher interest rates allow the Fed to sink excess money out of the economy, shrinking the supply and driving the dollar back up.
Many experts feel that the Fed won’t have much of an impact on inflation now, though. The demand from customers hasn’t slowed down even as inflation hit its highest rate since 1990. Manufacturers are posting record profits even while the prices for consumer goods soar. Analysts are now warning shoppers to expect the worst: inflation could be here to stay.
The shipping industry’s bottlenecks have resulted in retailers passing overheads to customers. Even when the issues with cargo boats are gone, though, retailers are unlikely to drop their prices. How often does a grocery store lower the cost of milk? Has the sticker price for new cars ever gone down over the years? Inflation isn’t the kind of pattern that goes away when the conditions that spawned it vanish.
MAGNET CEO Ethan Karp told Yahoo Finance that this pattern will last longer than the Fed wants to admit. Inflation, Karp explains, sticks around because, if you’re a retailer, “you’re not going to go back and reduce your prices for consumers.”
This pattern means that consumers should expect monetary devaluation to continue into 2022 and beyond. Ideally, the rate of inflation will slow down once the logjam at the ports has cleared. But even that could be wishful thinking. The high consumer demand and the low number of porters is a pattern that might last for years, fundamentally altering the nature of global commerce.
Retailers will account for these costs, one way or the other. That might mean they find new ways to incorporate redundancy into the supply chain. Either way, securing these goods will cost more, and customers will eat those costs.
Will the Infrastructure Bill Make Things Worse?
Some investors have expressed concerns about the recently passed US infrastructure bill. This fear stems from the inflationary pressure the American Rescue Plan placed on the economy. That law, passed in early 2021, was paid for through deficit spending and authorized direct relief checks to most Americans.
Phillip Swagel, the Congressional Budget Office’s director, told guests at a bipartisan event Monday that the ARP “provided a wide range of resources throughout the economy to families, to schools, to many others”. Because of these resources, Swagel said, “we’ve seen very strong demand and against the supply constraints, that strong demand has led to higher inflation.”
The infrastructure bill, meanwhile, isn’t being paid for through deficit spending. The White House insists that the new law could reduce inflation instead of spurring more monetary devaluation. Transportation Secretary Pete Buttigieg explains, “some of those price pressures come from the fact that our goods are moving across infrastructure that has been neglected for a long time.”
Swagel echoed this sentiment, suggesting that infrastructure spending would take more time to flow back into the economy, delaying the time before that money impacts the dollar. Moreover, he adds, “We know that there is a positive effect of infrastructure investment on productivity and therefore on GDP and that in turn will mean a better supply side.”