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Stubborn Inflation Creates Policy Dilemma

The Fed is caught between a rock and a hard place.

Inflation rose 0.4 percent in February on an adjusted basis, slipping slightly from the 0.5 percent increase in January, according to the U.S. Bureau of Labor Statistics on Tuesday. The data points indicate that inflation rose 6 percent over the last 12 months.

Apparel prices were up 0.8 percent in February, flat from the up 0.8 percent rate in January, but prices rose 3.3 percent on an unadjusted basis over the last 12 months, data from the Consumer Price Index indicated. Transportation services reflected the largest increase for the month, at up 1.1 percent from an increase of 0.9 percent last month, bringing the inflation rate 14.6 percent higher over the past 12 months.

“We expect inflation will gradually slow over the course of the year,” UBS economist Alan Detmeister said on Tuesday, adding that the “path for inflation is likely to be volatile over the next six months.”

The pressure’s now on for the Federal Reserve as its gears up for its meeting next Wednesday. With inflation up 6 percent, well above the Fed target of 2 percent, the big question is what the Federal Open Market Committee (FOMC) will do in terms of raising interest rates. What it decides will have an impact on commercial lending rates for fashion firms, not to mention a possible impact on consumer spending.

“Up until last week, it seemed likely that the FOMC would announce another 25 bps (basis points) rate hike, if not 50 bps, at the conclusion of the meeting,” economists at Wells Fargo Economics concluded in a research note Monday. “However recent developments significantly increase the probability that the Committee will refrain from hiking rates on March 22.”

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The developments the economists were referring to was the collapse last week of Silicon Valley Bank (SVB) and Signature Bank, the second and third largest bank failures in U.S. banking history. The two were eclipsed only by the 2008 collapse of Washington Mutual.

U.S. President Joseph Biden on Monday sought to ensure American confidence in the banking system, stressing measures taken to limit the fallout from the two recent failures. And while mid-size regional banks felt the brunt of investor concern as their share prices dropped, Biden emphasized that the financial market is safe and there there is no risk of contagion in the banking sector.

Meanwhile, many tech start-ups were banking customers of SVB. Fashion tech firm Stitch Fix on Monday said it isn’t counting on access to its $40 million revolving credit line from SVB, but it also said in a regulatory filing that it has sufficient cash and cash equivalents to meet working capital and capex needs for the next 12 months. Etsy reportedly had to delay some payments owed to its seller base on Friday. The company was expecting to make those payments through another provider on Monday. Shopify CEO Tobi Lütke tweeted that SVB impact was “very minor.” He also tweeted an email sent out by Shopify chief operating officer Kaz Nejatian noting that Shopify was working with merchants to help them make payroll.

Complicating matters for the FOMC is the still relatively strong jobs market. Job growth was robust in February, with 311,000 new jobs added and the labor participation rate now at a high of 62.5 percent. However, the unemployment rate inched up to 3.6 percent from 3.4 percent. What’s missing is any increase in retail jobs as most gains are in the service sector. That makes sense as more consumers are heading out and meeting with friends, transferring discretionary spending from goods to services and boosting employment in areas such as restaurants and food.

“The share of industries adding jobs in February fell to its lowest share since April 2020. Small business hiring plans are back to pre-pandemic levels, and job openings and private postings are trending lower,” Wells Fargo economists Sarah House and Michael Pugliese concluded in a research noted last week following Friday’s jobs report. “Layoffs are picking up and will likely leave a more discernable effect on payrolls in the spring as severance packages expire.”

That’s not good news for the retail sector, which already has a job-growth problem.

Earlier this month, Qurate Retail said it was cutting 400 headquarter jobs. Retail in general has been slashing jobs following a lackluster holiday season. Factors and credit analysts point to Saks as one of retailers seeking markdown money to shore up margins, as well as asking suppliers for more time to pay its bills. also is cutting 100 jobs. Bed Bath & Beyond’s Canada bankruptcy isn’t helping retail jobs either. That filing saw 1,400 jobs wiped out as its shuttters 54 Bed Bath & Beyond locations an 11 BuyBuy Baby doors as part of its wind-down process. And a Kohl’s reorganization in January shed 60 workers at corporate headquarters.

Overseas, German retailer Zalando last month said it will “let go” of some of its employees, although there are no specifics on how many or in which divisions. And department store chain Galeria Karstadt Kaufhof, one of the oldest in Europe, is set to close 52 stores of its 129 doors, leaving as many as 5,000 out of a job. The chain in October filed for insolvency for the second time in the last two years.

The latest round of job cuts started in the tech sector, with Amazon’s 18,000 job cuts, Microsoft’s 10,000 and Google 12,000 starting the initial wave. On Tuesday, Facebook owner Meta said it will lay off 10,000 more workers, on top of the 11,000 employees cut in November.