Stimulus, Spending and a Return of Masks

The latest round of stimulus checks are set to arrive this week with the expansion of the child tax credit passed by the Biden administration in March. Families with children under the age of 18 and household income under $112,500, or $150,000 for married couples, will receive payments of $250-300 per month per child.

The expanded child tax credit is?“aimed at cutting the child poverty rate”?and was part of the coronavirus stimulus package passed in first quarter. The program is expected to cost?$105B, with checks sent out monthly for half of this year's subsidy. The rest is poised to come as a tax refund in 2022.

Treasury Secretary Janet Yellen has called for the monthly installments to be permanent, saying the program is?"something that's very important to continue." "It certainly will add to spending, but most importantly, it provides support for families to take care of the needs of children.”

Earlier this week, Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday on the state of the economy and the recovery. While investors had hoped for further clues regarding the Committee’s pathway to policy adjustments, little, if any, new information could be gleaned from the Chairman’s prepared testimony, or the many hours of questioning by officials.

There were really only two types of questions over the two days. The first were politically motivated designed to bait the Chairman into commenting on fiscal policy – taxes, infrastructure spending, deficit spending – to which the Chairman politely replied,?“That’s your job – or the job of the Treasury.”?“It’s not my job to comment on fiscal policy,”?he said.?

The second type of question focused on monetary policy and more specifically, inflation. The Chairman was asked several times, several different ways, with many different individual antidotes attached, but the answer was always the same: inflationary pressures, while higher than anticipated, are expected to prove transitory. Price pressures are concentrated in those areas hardest hit by the pandemic and related policies and, as the economy recalibrates, inflation will expectedly abate.

While the message was very much expected and in line with commentary from the Fed over the past few months, the latest inflation figures are complicating the market’s acceptance of the Fed’s inflation-dismissal rhetoric.

Speaking to CNBC yesterday, Treasury Secretary Janet Yellen echoed the Fed’s confidence of a future decline in price pressures.?“We will have several more months of rapid inflation,”?Yellen said.?“So I'm not saying that this is a one-month phenomenon. But I think over the medium term, we'll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it."

Speaking of inflation, on Wednesday, the PPI rose 1.0% in June, more than the 0.6% gain expected, according to?Bloomberg, and following a 0.8% rise the month prior. Year-over-year, producer prices jumped 7.3% in June, the largest gain on records dating back to 2010.

Food prices rose 0.8% following a 2.6% gain in May, and energy prices increased 2.1% in June. Excluding food and energy costs, the core PPI rose 1.0%, double the 0.5% rise expected, and following a 0.7% increase in May. Year-over-year, the core PPI increased 5.6%, also the largest gain on record.

Additionally, services costs rose 0.8%, thanks to a 2.1% gain in trade costs, a 0.9% increase in transportation and warehousing costs, and a 0.3% rise in other costs in June.

Earlier this week, on Tuesday, the CPI jumped 0.9% in June, surpassing the 0.5% rise expected, according to?Bloomberg, and the largest increase since June 2008. Year-over-year, consumer prices rose 5.4%, the most since August 2008.

Food prices rose 0.8%, while energy prices increased 1.5% in June, following no change in May. Excluding food and energy costs, the core CPI rose 0.9%, more than the 0.4% gain expected, according to?Bloomberg, and following a 0.7% increase in May. Year-over-year, the core CPI increased 4.5%, the most since November 1991.

In the details, commodities prices rose 1.7%, transportation prices increased 3.6% and recreation prices gained 0.2% in June, following a similar gain the month prior. Also, housing prices increased 0.4%, thanks to a 0.3% rise in the OER. Additionally, education and communication costs rose 0.1%, apparel prices increased 0.7%, and other goods and services costs rose 0.1% at the end of Q2. On the weaker side, medical care prices fell 0.1%, the second consecutive month of decline.

Bottom Line:?The largest year-over-year increase in the headline and core CPI since 2009 and 1991, respectively, continues to fuel inflation fears and should add additional momentum to those at the Fed anxious to begin a removal of accommodation – or at least issue a timeline for doing so. Of course, much of the uptick in costs continues to reflect a reopening of the economy with some of the hardest-hit industries – including apparel, autos, and travel – accounting for the majority of rise. As the economy recalibrates to a post-pandemic normal, price pressures from reflation should begin to subside, proving?“transitory”?as the Fed says.

As the timeline extends, however, for prices to slow, patience will be tested both among policy makers and market participants. For now, inflation expectations remain in check at 2.2%, but month after month of higher-than-expected readings on inflation is getting more difficult to tolerate.

We discuss the rise in inflation and the challenge the recent backup creates for Fed policy in this week’s edition of the Economic Insight which was published yesterday late afternoon. To receive a copy of the?“Economic Insight: The Latest Rise in Prices Challenges Fed’s “Transitory” Stance,”?please email:?[email protected].

This morning, retail sales unexpectedly rose 0.6% in June, a two-month high. According to?Bloomberg, sales were expected to decline 0.3% at the end of the second quarter. May sales, however, were revised down from a 1.3% decline to a 1.7% drop. Year-over-year, retail sales rose 18.0% in June, following a 27.6% annual gain in May, a record high.

Car sales fell 2.0% in June following a 4.6% decrease the month prior, while gasoline stations sales rose 2.5% following a 0.2% increase the month prior. Excluding autos, retail sales rose 1.3% in June and rose 17.6% over the past 12 months. Excluding autos?and?gasoline, retail sales increased 1.1% and gained 15.8% year-over-year.

In the details, clothing sales rose 2.6%, non-store retailer sales increased 1.2%, and health and personal care sales gained 1.6%, a three-month high. Also, eating and drinking sales rose 2.3%, food and beverage sales increased 0.6%, miscellaneous sales rose 3.4%, and electronics sales gained 3.3%. Additionally, general merchandise sales rose 1.9%, thanks to a 5.9% increase in department store sales. On the weaker side, sporting goods sales slipped 1.7%, the third consecutive month of decline, furniture sales dropped 3.6%, and building materials sales fell 1.6%, following a 5.3% decline in May.

Bottom Line:?An unexpected rise in retail sales, as the U.S. consumer remains solid with $2.3T in savings, a 12.4% savings rate and wage growth of 3.6% as of the latest June jobs report. However, going forward, as government stimulus fades – with the majority of the direct checks paid out in March and April – the U.S. consumer will expectedly begin to pullback on some monthly expenditures. Additionally, as consumers shift their monthly basket of purchases from semi-durable goods purchased last year, to more service-based expenditures, month to month volatility is expected. Furthermore, with federal support set to expire in the coming months, job and income growth will become the primary supports to activity, which will likely result in a somewhat uneven, albeit positive, rate of consumption towards year-end and into 2022.

In health news, as we noted yesterday, according to Johns Hopkins University data, the number of new U.S. COVID-19 cases per day has doubled over the past three weeks to 26,000, driven by the highly contagious Delta variant. The Delta variant now accounts for nearly 58% of U.S. infections. According to the World Health Organization (WHO), the variant has furthermore been detected in at least 111 countries and is likely to become the dominant variant globally?"over the coming months."?As a result, L.A. County has reinstated indoor mask mandates regardless of vaccination status.

-Lindsey Piegza, Ph.D., Chief Economist