The inflation Grinch

November 25, 2024 | read time icon 5 min

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This week marks the official kickoff of the holiday season. In any given year, about 20 percent of annual retail sales are wrapped up in the weeks between Thanksgiving and New Years Day.

The National Retail Federation expects 2024 to deliver the strongest holiday shopping season on record. Consumers are projected to increase their spending by more than $25 per person to a total of $902, $16 higher than the previous record set in 2019.

Despite these rosy projections, inflation is likely to be an uninvited guest at holiday celebrations this year. 

Sales are strong

Retail sales in October were up almost 5 percent from 12 months earlier, suggesting that people are ready to open their wallet for the holidays. But inflation is rearing its head again. The Consumer Price Index, a measure of inflation, rose an annualized 2.6 percent last month, up from 2.4 percent in September.

Wages aren’t keeping up

Higher prices could dim holiday cheer. For a long time, wage growth for hourly employees was  outpaced by inflation.

In the months preceding the pandemic, wage growth as measured by ADP payroll data was sluggish. But as the economy rebounded from the pandemic downturn, wage growth took off, exceeding the rate of inflation from the spring of 2020 to the spring of 2021.

Inflation then began to pick up, and wage growth again trailed behind.

Even though inflation has slowed dramatically since its June 2022 peak of 9.1 percent, wages are only slightly above water. In October, year-over-year inflation-adjusted wage gains were a modest 0.3 percent.

Delinquencies and savings

Thankfully, credit card delinquencies aren’t cause for concern. The rate of credit card delinquencies was 3.2 percent last quarter, below the 30-year average of 3.6 percent, according to Federal Reserve data.

The flip side is that consumers aren’t saving as much as they typically have. The personal savings rate was 4.6 percent in October, more than a percentage point below the 30-year average of 5.8 percent, Fed data shows.

My take

Sometimes one chart says it all. At the start of the 2019 holiday season, just before the pandemic, inflation-adjusted pay for hourly workers was growing 3.6 percent year over year, 150 basis points more than the rate of inflation. Real wage growth now is still outpacing inflation, but by only 30 basis points.

Consumers might spend at record levels over the winter holidays, but the inflation Grinch has yet to change his ways.

The week ahead

Tuesday: The Census Bureau releases data onnew home sales, and S&P CoreLogic Case-Shiller will give us a read on home prices. Lately, newly constructed houses have made up a larger share of residential real estate sales than their historical average, due to a low inventory of existing homes. The annual pace of existing home sales hit 3.96 million in October, and the median sales price was up 4 percent to $407,200.

The Conference Board’s Consumer Confidence Survey  will be refreshed for November, giving us another input on the forecast for holiday shopping. 

Wednesday: The highlight of a day full of economic releases will be the Bureau of Economic Analysis release of Personal Consumption Expenditures, the inflation indicator that the Fed follows particularly closely. PCE data will be a key input as Fed policymakers decided whether to cut rates in December. Census also will release data on durable goods sales (especially handy for those of us expecting expensive gifts this winter) and the BEA will have their second read on third-quarter GDP.