How high will the November consumer price index turn out to be on Tuesday?
How much will the Federal Reserve decide to raise interest rates on Wednesday?
And what will November retail sales tell about the Christmas shopping season on Thursday?
Questions aplenty this week for the economy and the markets with answers to come in a data-filled week that puts the final stamp on two of 2022’s most important economic trends: the pace of inflation and the level of interest rates.
“Inflation has dominated the economy this year, and the economic outlook depends in large part on the path of inflation and the amount of pain required to get inflation back on track,” Joey Politano, a labor market expert and independent economics blogger, wrote Saturday on his Apricitas Economics blog.
The week’s highlight promises to be the Wednesday decision by the Fed on how much to raise interest rates with experts predicting a 50-basis-point hike after Chairman Jerome Powell signaled as much earlier this month in a speech at the Brookings Institution.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said. “We have a broad set of thoughts about where that destination might be, but we could be wrong. We’ll have to see.”
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Analysts will pore over the decision but also scrutinize Powell’s comments at the press conference that follows the announcement and the updated economic projections that will be released.
By then, the Fed will have the news on Tuesday of November’s consumer price index. Estimates are for a continued downward trend in price increases, with a monthly increase of 0.3% compared to October’s 0.4%, and a yearly rate of 7.3% after the prior month’s 7.7%. While that is considerably above the Fed’s long-term goal of a 2% annual average, it will be the direction and trend that matters most.
There has been notable improvement of late in several key areas that have contributed to the fastest growth in prices since the 1980s. The price of oil, now trading internationally at $75 a barrel, is way below its spring level of around $125. Apartment rents fell more than 2% in November, while used cars, electronic goods and other items have also receded from year-earlier prices. Wage growth, an important element in the overall inflation picture, is slowing.
Still, ING Chief International Economist James Knightley sees the Fed continuing to increase rates well into 2023 before switching gears and the economy slows more.
“We look for a final 50bp hike in February, taking the Fed funds ceiling to 5%,” he said on Friday. “But like the market, we think a recession will dampen price pressures and the composition of the US inflation basket, which is heavily weighted to shelter and vehicles, will facilitate a far faster drop in annual inflation readings than elsewhere.”
“Remember too that the Fed has a dual mandate which includes an employment dynamic,” Knightley added. “This offers the Fed greater flexibility versus other central banks to respond with stimulus and we believe it will from the third quarter of 2023 onwards.”
Meanwhile, consumers continue to spend, drawing down savings accumulated during the pandemic and reaching for their credit cards. The Census Bureau issues its retail sales report for November on Thursday. Economists are forecasting a drop compared to the 1.3% increase in October, though some predict a flat to slightly positive number.
“We’ll be looking to see if any cracks are forming in the foundation of consumer endurance,” Sam Bullard, managing director and senior economist at Wells Fargo Corporate & Investment Banking, wrote on Sunday.
“Debt burdens are continuing to rise, and while household balance sheets are still in better shape than they were pre-Great Recession, the low rate of personal savings means consumers will eventually hit a wall in their aggregate spending habits,” he added. “We do expect resilience to continue into the holiday season; however, we expect retail sales rose just 0.1% over the month in November.”