As inflation continues to rear its ugly head, the world’s central banks are expected to begin tightening monetary policy sooner than later.
Speculation on Friday that the Federal Reserve in the U.S. might need to resort to a 50-basis point interest rate hike in March led to volatility in the equity markets. The thinking before the U.S. Bureau of Labor Statistics (BLS) report of its Consumer Price Index (CPI) on Thursday saw expectations of a series of 25-basis point hikes over the course of the year. The Dow Jones Industrial Average on Friday ended the day’s trading session with a 503.5 point decline, or down 1.4 percent, to 34,738.06.
But overall CPI rose to a seasonally adjusted 0.6 percent in January and was up an unadjusted 7.5 percent over the last 12 months, according to the BLS report. For the month, retail apparel prices rose a seasonally adjusted 1.1 percent in January from the prior month and on an unadjusted basis increased 5.3 percent from a year earlier.
The uptick in prices reflected the biggest gain since February 1982, leading many to conclude that inflation was rising higher and faster than expected. And following the inflation data Thursday, the St. Louis Fed President James Bullard became more hawkish, calling for a full percentage point rate hike by July. Markets on Thursday began accepting Bullard’s view, factoring in a new Fed target policy rate to 1 percent to 1.25 percent by the end of June. With three meetings between now and then, Bullard’s comments suggested one rate hike of 50 basis point to meet the suggested target policy rate.
The possible double-rate hike for March also led to the 10-year Treasury yield on Thursday jumping above 2 percent for the first time since 2019. And with the increase, and possibly many more, there’s now concern that an inflated yield curve is in the works. That’s because an inverted yield curve, where short-term debt has higher yields than their longer term counterpart, is often used as a predictor that a recession could be on the way. The impact on fashion businesses when the curve inverts would be that profit margins over the near term would decline for companies borrowing money at short-term rates.
On Monday, Bank of America’s chief economist Ethan Harris said the Fed could implement more rate hikes than expected, with possibly seven 25 basis point increases this year and four in 2023, which would put the peak funds rate at 2.75 percent to 3.0 percent next year.
“Even though we sound like we’re uber hawks talking 25 basis points in each [Fed] meeting this year, I actually think it’s [not] radical. It’s just the path of least resistance for a central bank that’s starting at zero,” the chief economist said.
Exceptionally strong demand is running up against constrained supply, Harris said, emphasizing that the latter is what’s generating inflation pressure.
Harris is not the only one calling for seven rate hikes. Goldman Sachs is too, as both see a need to cool an economy that’s seen far more inflation than expected.
Consumers are feeling some pain too. The preliminary reading for the University of Michigan’s consumer sentiment reading for February fell to 61.7, down from 67.2 in January.
Economists at Wells Fargo Securities on Friday said the consumer sentiment report marked a “fresh decade low” as both views regarding current conditions and expectations for the future moved lower even as the Covid situation in the U.S. is showing signs of improvement.
The economists in a report said weaker expectations centered on consumers’ view of their financial situation. “This shouldn’t come as a surprise when considering the massive amount of fiscal support reaching households at the onset of the pandemic has now ended, and households continue to contend with higher prices,” they concluded. “Despite wage growth running almost as hot as inflation, the share of consumers expecting household income gains to outpace prices over the next five years dropped to 36.4 percent as higher prices and the lack of forthcoming stimulus mean consumers are beginning to recognize their dollars will have to stretch farther in the coming months.”
Consumer expectations on personal income is also weighing on buying intentions. On Friday, rates for a 30-year fixed mortgage was at 4.3 percent, while oil soared 3 percent to a 7-year high. And JPMorgan’s global commodities head warned that prices could rise to $120 a barrel, a move that would impact higher costs at the pump. Crude oil prices impact about 50 percent of the price for a gallon of gas, with the balance connected to state and federal taxes, as well as refinery and distribution costs. Those higher costs all around is expected to impact consumer discretionary purchases, including apparel, accessories and footwear, and even home goods as they focus on gas for the car and food for the table.
“This dynamic of inflation weighing on income was a main factor influencing our decision to bring down our estimates for real personal consumption expenditure to an annualized growth rate of just 1.0% in the first quarter,” the Wells Fargo economists said.
UBS softlines analyst Jay Sole last month said that inflationary pressures could see consumers pulling back on apparel and footwear spending as rising interest rates become a headwind on demand, and that will impact retail sales and merchandise margins.
The U.S. isn’t the only country faced with the conundrum of what to do about rising prices. And what central banks do will have an impact on global fashion brands and retailers as the probability increase that they too will begin to tighten on policy, leaving less income for discretionary purchases. Earlier this month, the Bank of England implemented its first back-to-back rate increase since 2004, raising rates 25 basis points to 0.5 percent in hopes of tamping down inflation following a 25 basis point increase in December. And just this week, there was talk that the European Central Bank would also begin tightening as well. Other central banks also have indicated that policy action could be forthcoming in the months ahead.
Meanwhile, CEO confidence fell in the first quarter of 2022, representing the third consecutive decline.
The Conference Board’s Measure of CEO Confidence, in collaboration with The Business Council, now stands at 57, down from 65 from the fourth quarter of 2021. The Measure is also down 25 points from the all-time high of 82 that was recorded in 2021’s second quarter. A reading above 50 points reflects more positive than negative responses.
In general, the first quarter survey indicated that CEO’s assessment of general economic conditions declined in the period. Thirty-four percent of CEOs said economic conditions were better compared to six months ago, down from 61 percent in 2021’s fourth quarter. And thirty-five percent said conditions were worse, up from 19 percent. The CEOs were also less optimistic about conditions in their own industries, with 40 percent noting that conditions were better than six months ago, down from 58 percent in the previous quarter. Twenty-two percent conditions in their industries were worse, up from 18 percent.
Looking ahead, 50 percent said they expect economic conditions to improve over the short-term, about six months out, down from 61 percent in the fourth quarter. And 23 percent said they expect conditions to worsen, up from 13 percent. As for prospects in their own industries, 58 percent said they expect conditions to improve, down from 61 percent, while 13 percent said condition will worsen, up from 8 percent.
“CEO confidence fell further to start 2022 as business leaders struggle to contend with inflation, labor shortages, and yet another viral surge,” Dana Peterson, The Conference Board’s chief economist, said. “In the midst of Omicron’s sudden impact, only one-third of CEOs now report current economic conditions are better than six months ago—down dramatically from over 60 percent in [the fourth quarter of] 2021.”
Peterson noted that expectations for future conditions also softened, although half of the CEOs surveyed—roughly doubled the proportion expecting conditions to worsen—still expect the economy to improve over the next six months.
In the first quarter survey, respondents were also asked to share their views on the most pressing Covid impacts and the business and policy response to surging inflation. In general, CEOs were pessimistic about a a quick turnaround in inflation. Nearly 75 percent said interest rate hikes were unlikely to curb inflation because of supply constraints and wage inflation. In contrast, twenty-one percent said they expect rate hikes will reduce inflation. In addition, nearly 30 percent said they would pass along rising transportation and labor costs within six months, while an additional 45 percent said they expect to pass along the costs within six to twelve months.
And as the pandemic enters its third year, 95 percent of CEOs didn’t see the need for additional Covid relief. They cited employee fatigue, disruption of return-to-work plans and rising costs as the top three ongoing impacts from the Delta and Omicron surges.
“CEOs are preparing for supply constraints and wage inflation to persist well into this year and potentially beyond,” Roger W. Ferguson, Jr., vice chairman of The Business Council and trustee of The Conference Board, said. “While interest-rate hikes should help dampen inflation, few are expecting prices to stabilize rapidly.”
Sixty-six percent of respondents also said they expect to expand their workforce over the next 12 months, and 85 percent said they foresee increasing wages by 3 percent or more over the next year, up from 79 percent in the fourth quarter. But with rising costs, companies are also rethinking their capital spending. Forty-eight percent said they expect to increase their capital budgets in the year ahead, down from 57 percent in the fourth quarter.
The survey was conducted between Jan. 17-31.