Services inflation still 'a major headache' for consumers

Recent inflation data has left markets uncertain about the Federal Reserve's next steps in combating inflation through potential rate cuts. As consumers feel the pressure of higher prices, National Retail Federation Chief Economist Jack Kleinhenz joins Yahoo Finance to discuss the state of the consumer.

Kleinhenz states that March's hotter-than-expected CPI data "created more uncertainty" around the Fed's monetary policy path, with the report revealing that inflation "remains the number one problem for households and consumers." However, he notes that retail has seen a slight deceleration in inflation, indicating that "inflation pressure is still in the service industry, not so much in the goods industry."

While Kleinhenz acknowledges that credit card delinquencies are a "concern to be watched," he states that the overall balance sheets of households are generally "in pretty good shape." Nevertheless, he observes an "evolution" over the past couple of years, with consumers becoming "smart shoppers."

However, as they continue to spend and necessities become more expensive, he says services inflation will be "a major headache for households."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

JOSH LIPTON: US producer prices rising less than expected in March. The softer data comes on the heels of a hotter than expected inflation print on consumer prices. Jack Kleinheinz, the National Retail Federation Chief Economist joining us now.

Jack, it is good to see you. So maybe we'll start there, Jack. We did get another important inflation print today, March PPI. I'm interested, Jack, the trajectory of inflation. Where do you see it? Where we are? Where we're headed? And what does it mean for consumers?

JACK KLEINHENZ: Well, thank you for having me today, Josh and Julie. Certainly, the inflation information that came out yesterday just created more uncertainty about where the Fed's going to go in terms of its changes in monetary policy. The certainty, though, is that it remains the number one problem for households and consumers.

Actually, from a retail standpoint, we've seen a tremendous deceleration in retail prices over this past year. I look at the personal consumption expenditure index. And if you look at it on a year-over-year basis for the last two months, retail prices, in general, have been down almost 1%. Again, on a year over year basis.

So I think what we're seeing in many ways is the inflation pressure is still in the service industry, not so much in the goods industry.

JULIE HYMAN: And what effect is this eventually going to have on spending? I mean, the one report that caught our attention out yesterday from the Federal Reserve Bank of Philadelphia found that credit card delinquency rates in the US, the highest on record. What tends to happen? Or is that a forward indicator of spending?

JACK KLEINHENZ: Well, delinquencies are up. We've been watching it closely. They seem to be concentrated though at the low end of the income spectrum. And for younger people, it is a concern, and concern to be watched.

But overall, the balance sheets of the households are in pretty good shape. They have the income. They look pretty good in terms of the growth in income. The amount of debt they're servicing is still well within reason based on their wherewithal.

So I think it's just sort of an issue that we're going to have to watch closely. And it's concentrated really in only really a small portion of the income spectrum.

JOSH LIPTON: Jack, when we heard retailers reported earnings, one theme that emerged, at least some of those companies on their conference calls, you would hear the execs talking about maybe a shift here. Consumers more focused on what they need rather than what they want. Is that what you're seeing in the data?

JACK KLEINHENZ: Yeah, there's no doubt about it. I think that there has been an evolution from where we were a couple of years ago. And I think they're just being smart shoppers. Again, I believe that the household is in pretty good shape because they feel pretty secure about their jobs. They will continue to spend.

But in terms of the things that they need, it's also the things that they need that have higher prices and not so much in the retail world. As I've just mentioned, it's the service industries that are causing a real headache for households. The cost of medical care, insurance on cars, all those service prices that we've seen in the CPI that have gone up.

That's really a major headache for households. It's obvious to you. But it does wear thin over in the retail sector because there's going to be a trade-off on spending, let's just say for discretionary retail goods versus non-discretionary.

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