Stagflation Concerns Grow As Retail Sales Lag With Price Growth Above Three Percent

(KNSI) – St. Cloud State University Economist King Banaian says this week’s inflation reading is a perfect example of what is known as the “last mile” problem.

He explains, “We were able to get from six to five very easily, five to four without too much trouble, and now we’re trending toward 3%. But that getting from 3% to the Fed’s target of 2% is going to take some time.”

The February Consumer Price Index was 3.2% above the year prior. Core CPI was even higher, at 3.8%. Federal Reserve officials have said they would like to begin rate cuts later this year, but Banaian notes they have been consistent in their commitment to following where the data leads.

If core inflation continues to hover around four percent, or begins to reaccelerate Banaian thinks there is a small risk of the Fed being forced to raise interest rates again. He says the stock market is not prepared for that possibility.

While stuck with sticky inflation on one end, the central bank also has to deal with growing red flags over the health of the American consumer. Banaian says the revisions to January’s retail sales data were particularly troubling.

“Here’s one I would emphasize. Restaurant and bars…in January, we were told initially that retail sales were up seven-tenths of a percent. Today, they announced that, “No, no, no. It wasn’t up seven-tenths, it was down 1.0%. That’s a very big change.”

Banaian says inflation and high interest rates, combined with the drawdown of savings as pandemic stimulus efforts end, have consumers pulling back. This is the type of stagflation that had economists predicting a recession in 2023, even though that ended up not occurring.

Banaian doesn’t necessarily agree with some of his colleagues that there will be a “no landing” scenario where Fed tightening doesn’t eventually cause a recession. He thinks the resilience shown in 2023 likely suggests the downturn will be milder than he and others anticipated.

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