A hotter-than-expected September inflation print portends another jumbo rate hike. Today, we take a deep dive into the data, examining how inflation is influencing consumer behavior. We discuss with Jonathan Levin.
This is Bloomberg Opinion Deeper Conversations on the week's most significant developments. I'm Vonnie Quinn. Consumers in the US have been resilient faced with persistently high inflation. This much we know that behavior, though, is showing signs of shifting. I spoke with Bloomberg Opinion columnist Jonathan Levin, who has been examining the data. So, Jonathan, what consumers say they'll do and what they actually do are often very different. That's an established behavior, but now it seems like we're seeing what they're doing shift. You've been examining the data, what is it telling you? Yeah, more or less. I looked at a fascinating series that Morning Console does, and every month they interview hundred US adults, and one of the things that they've been asking them for the past six months is like, when you go to the store, do you experience sticker shock? And when people say you say, yes, I'm experiencing sticker shock, Morning Console then ask them, Okay, so how do you deal with sticker shock? Do you just walk out the door and go home empty handed? Or are you trading down or are you just sort of sucking it up and paying those higher prices, and what Morning Console is increasingly seeing, especially for their very latest round of this data, is that people are just opting not to buy the thing. Still a lot of trading down as well, but some people are just turning around, doing a one A D and walking out the door. And it had been kind of a mystery, right, how the consumer was being so resilient in the face of so much inflation. I guess the mystery is now being solved. The consumer is starting to not be so resilient. Yeah, exactly. And to be clear, you know, I see these developments with the US consumer is a very very slow burn, right, So what the Morning Console data seems to be predicting if you sort of run the time series against real personal consumption and real retail sales and things like that, seems to be suggesting that we are going to see real declines in spending in the months ahead, of course, and not coominal terms. You might interpret that as continued resiliency. That does not mean like a crash incorporate earnings. That doesn't mean that retail sales automatically fall off the cliff, but it does put the U S consumer in sort of a precarious position, whereby if we are hit by another shock, and there's a lot of scary stuff out there that could deliver such a shock, the US consumer is in a very perilous position. Sticker shock, Jonathan, define it for us a little more. Is it about actual spending power or more like elevated inflation expectations or fear of recession? Yeah, I think it's mostly just the consumer's response to inflation. In other words, sticker shock is defined here is you know, you go to the store, You're expecting to pay one thing, and the store is charging something else. Of course, you combine that with the fact that in real terms, people's purchasing power has been going down for the better part of wages have indeed been increasing at meaningful clip, but they're losing their purchasing power after adjusting for inflation. So that's another thing I want to ask. When consumers retrench and it looks like they're beginning to just start retrenching, do they start sticking more closely to their jobs. Will we see it in the quits rate, for example, or the Jewels survey. Yeah, that's a very interesting point, you know, and when you think about how all these dynamics work, together is potentially going to be as weird as it sounds, maybe even a net positive in the short run as far as monetary policy goes. You know, there's some interesting trade offs there. The FED, of course, would love to see people quitting at lower rates and be able to get the trend rate of wage increases down from somewhere in the five percent range to something that they think is more sustainable, like a three point five Now. Bank of American CEO Boyan moynihan told us that consumers are showing resilience. Are we talking about the same consumers or does it just take longer if we're to percolate through the banking system. I think what moynahan is saying is very much consistent with what we have seen in the data. Essentially, you know, three Q was a pretty decent quarter, and that's consistent with this sort of slow burned thesis. Right. We have to remember that the consumer went into two with an extraordinarily strong balance sheet, large cash balances, and a tremendous capacity to borrow more. They paid down a lot of their deaths during the pandemic, They refinanced their mortgages at very attractive rates, and so they had a long, long runway then as much as the psychology, you know, starts to weigh on them. And I think that the psychology started to weigh on the months and months ago, you know, even when we first got hit with the gasoline shock. But they were able to take a step back and say, well, you know, this is tough, but I can deal with this for a few months, six months and twelve months because my bank account is flushed, So I'm going to suck it up and I'm not going to change the way that I live. What the morning Console data is flagging for us is that that runway is getting a little bit shorter, right, and people are finally starting to say, you know what, this is maybe not crisis mode for me yet, but I really need to start to make some lifestyle adjustments to make sure that I'm going to be okay if things get dicey going forward. Well, it's a little chilling when you see has Row saying that people are buying fewer toys, because the last people you want to punish in an environment is where you're experiencing a little bit of tightening. Our children, right, the people you buy toys for. Yeah, and you know you bring up toys. I think the holiday season is another important part of this if you want, you know, a little bit of a bowl case to temper some of my my personal negativity on this. My my colleague Andrew Feldstad wrote a great column recently where she really focuses on this is going to be the first holiday seas in with out really any sort of restrictions on movement from COVID. So, you know, as much as some of these factors are starting to weigh, it could be that consumers at least in many parts of the world reach for one last hurrah in this fourth quarter and that you know, the slover and that I keep talking about, gets pushed back yet another quarter here. But it is so fascinating just talking about inflation, isn't it, Because as you point out, at the beginning, it was gasoline used car prices. Then most of the inflation was being blamed on commodity costs after the invasion of Ukraine. But now it seems to be not just about things like shelter or used cars. It's broad and deep, as you point out. Yeah, absolutely, I think it's been pretty clear to anybody who has come to this debate with an open mind that inflation has been everywhere for at least the past six to nine months. It's a broad based adjustment in the price level. It's not about idiosyncratic factors. And you know, frankly, it began to six six to nine months ago. The team Transitory just kept on looking for new excuses for this thing, you know, after each and every previous excuse had failed. So the latest, the latest excuse seems to be, well, you know, let's focus on the lags in the housing data. And what I've been trying to say is just, yes, of course there are major lags in the housing data. Everybody is aware of that at this point. There have been many, many economist papers written about this. The FED absolutely accounts for that when they conduct monetary policy. But you have, you know, plenty of market participants and commentators out there saying, well, look, inflation is actually not that bad. Look how much of an influence housing is having right now? And actually no, you know, every month I do the exercise of let's strip housing out of this completely, because yeah, they're right, it could distort your ability to see an inflection point. But that inflection point is just not there. Period. You you do the exercise, you strip it out, and core inflation is still very high. It's in many categories that have absolutely nothing to do with housing. Big gainers in the past month, including pet services. I'm not sure where they are impacted by mortgages, you know, automobile insurance. Right, it's just sort of pick your poison. And the problem here is broad based structural inflation. You just can't make excuses for it. And you point out that it could actually make a resurgence, that it doesn't mean that it's plateaued at this point, Jonathan, how long does it take for consumers slowdown? And I know you're calling it a slow burn, but how long does it take for it to eventually be reflected in prices, in other words, to shift to the supply side of the economy. And how does that even happen Our companies forced to oro their margins eventually, or how does it work? Yeah, that's what you would expect, right, You know, it depends on what industry you're talking about, right, So, if you're talking about a services industry where they're facing very sticky wage pressure, for instance, from that tight labor market, but all of a sudden they're waking up to the fact that they can no longer pass on their higher input costs to the folks that are dining at their establishments, you might start to see if those margin pressures come up as soon as now. Um, you know, I think the consumer sector is an important place to remember the famous long and variable lags, and they are variously estimated to be in the twelve to eighteen months range. But basically, like I say, it's going to take some time for this to show up in the corporate numbers. You know, it seems reasonable to say, you know, maybe Q four is is the inflection point. But if things keep going the way they have been going, which is the say, little by little the consumer adjust their behavior each month, you're still not going to see any shocking shifts in the nominal numbers, maybe for many quarters to come well, which means it's on for the FED. Right. Another stunt of five basis point hike in November most likely does that punish the consumer instantaneously or even quicker than six to eighteen months. You know, it really doesn't seem like it. Until now the consumer sector has really been able to take these hikes. I think everybody is concerned that, you know, one day we're going to wake up to the true impact of these long and variable legs. And I think the Deves would say that the FED maybe has no idea what it's getting into, that it could be ugly when we finally get there. But you know, the real question just comes down to are you going to see an outside shock? You know, are we going to wake up one day and see that the housing market is crashing and so people are looking at their home equity and they're saying, oh, my goodness, I need to dramatically change my consumer behaviors. That would certainly be a breaking point. Any number of things that could happen with the war and the energy markets could be a breaking point. Any have number of things that could happen with European and Asian economies could do the trick. So it's impossible and probably imprudent to guess what such a shock could actually be. But there are so many things out there, Jonathan. How much is the bond market reflecting this as opposed to say, you know, a whole bunch of things, including expectations for FED policy. Yeah, I think the bond market seems to be in a fairly rational place, right, You've got the two year trading essentially call it thirty forty basis points below where the Fed Funds futures would imply. You know, we think the terminal rate is heading. That makes a degree of sense, right, because the bond market is pricing in this possibility that they may well not get there, that they may have to stop, sure because one of this series of unfortunate events could play out and they'll have to stop sooner. Bloomberg Opinions Jonathan Livin. Catch Bloomberg Opinion with me Bonnie Quinn on Bloomberg Radio weekends and every Friday as a podcast on Apple, Spotify or your favorite podcast platform, and do join in. Comments and opinions always welcome. I'm at Bonny Quinn on Twitter or email v Quinn at Bloomberg dot net. Until next time on Bloomberg Opinion