By Howard Schneider

WASHINGTON (Reuters), – The major retailers are like Target Corp (NYSE 🙂 and Walmart(NYSE 🙂 Inc might be cutting prices in order to free up warehouse space, but revenue for hoteliers is flooding in from daily occupancy and room rates that are higher than pre-pandemic.

The rate of price rises for used cars has slowed from its chart-topping peak that drove an initial spike in COVID-era inflation. However, airline fares were increasing at a similar staggering 33% annually rate as of April.

OpenTable data shows that restaurant prices are rising quickly, with no discernible drop in demand.

The Federal Reserve and Biden are currently focusing on the fight against inflation. In order to reduce prices, the planned rotation of spending, which was to shift from COVID lockdown purchases of goods to services in person, is supposed to help. The supply-chain bottlenecks, which prevented goods from reaching shelves, and drove up prices through scarcity, make services more resilient.

However, both sides of American consume are seeing an increase in inflation pressure. At least for now. Wage-sensitive service industries compete to find workers to fill the vacancies which remain at or above the national job open rate.

The Fed and Democrats are worried about inflation, but the Fed’s “great rotation” is not providing an easy solution.

According to Harry Holzer (a Brookings Institution Fellow and Georgetown University economist), “An increase in consumption towards services might not help much” given the higher demand for labor and greater wage growth in service industries. There is wage inflation in many sectors, from restaurants workers to professionals.

The latest consumer inflation data is due Friday. They will reveal that the headline price of gasoline rose 8.3% annually. This has been a prolonged price shock over many decades, which has reduced Americans’ purchasing power.

For its inflation target of 2%, the Fed employs a slightly different measurement, running at 6%. This has allowed it to make one its most rapid turns towards tighter monetary policies – with President Joe Biden’s approval in hopes that prices will soon ease.

‘OPTIMISTIC for THE CONSUMER’

The subtext of the headline number may prove to be more problematic.

As expected, inflation for goods is decreasing. There are growing signs that supply chain problems which plagued the global economy last fiscal year have improved.

Shipping costs have fallen, ports backlogs are decreasing, and the New York Fed index for overall supply chain stress eased through the May period, continuing the improvement that was seen at the beginning of the year.

Services are picking up the pieces. Except for energy-related services and other services, the inflation rate for core services has increased for eight consecutive months, with a larger share of overall inflation.

Consumer spending has not been affected by this, although “real” purchases that are adjusted for inflation have slowed a bit according to a Bank of America Institute study of credit cards spending.

According to the report, “As we search the data for bearish indicators, we remain struck by strong momentum of service sector expenditure.” “Additionally, households’ median checking and savings accounts are higher than pre-pandemic…Overall, we remain cautiously optimistic for the consumer.”

Indeed, the financial buffers created during the pandemic may have been a crucial factor in the failure or success of attempts to control inflation. Some estimates show that households still hold a few billion dollars more from the transfer payments made during the crisis or the extra money they received during pandemic-era transfers.

It’s enough to fuel consumption. This includes paying higher mortgage payments for homebuyers as interest rates rise. Or, as Bank of America pointed out, financing higher gasoline prices to pay more for consumer durables, which are likely to be in decline.

FAST ENOUGH

The picture isn’t clear.

Pantheon Macroeconomics Chief Economic Officer Ian Shepherdson gave a presentation late May. It was based on the following: Improving supply chains, a slowing home price appreciation and pressure on profits from higher inventories could all lead to CPI dropping below 3% in the early part of next year.

He maintains that there could be signs for this to show up at the Fed’s September meeting, when the Fed will slow down its rate rises by half-point to a quarter percent.

“If you were building an inflation model from the bottom up, all these variables that you would consider are starting to move in the right direction,” he said.

However, the rate of improvement is important. Fed officials say they are looking for convincing month-tomonth evidence that inflation has slowed before they slow down rate increases. Politicians will be disappointed to learn that $5 gas is available in the summer driving season, and before midterm congressional election.

Change will take some time, wrote Citi economists Veronica Clark & Andrew Hollenhorst.

According to them, prices will continue rising by 8.3% each year. This is “with upside risk and a continuing pick-up of services prices.” The Fed could keep their faster rate hikes in place if there is a rise in services inflation.