Fed still chasing long-gone inflation. STOP IT! Let the good times roll!

Last week, we saw that inflation continued at the moderate pace that has been the case for pretty much all of 2023. And this week, even with inflation slowing and wage growth being good-but-not-insane, we've seen that the real economy keeps rolling along. In fact, recent reports indicate things took a step up in July.

GDP gains have averaged above 2% in the first half of 2023, with the economy on pace to rise another 5.8% in the third quarter, according to updated projections from the Atlanta Fed.

At the same time, employment growth has slowed some but still remains robust. The unemployment rate was at 3.5% in July, hovering around its lowest level since the late 1960s. Job openings have come in some from record levels but still far outnumber the pool of available workers.

That Atlanta Fed estimate is their GDP Now tracker, and has been based on the economic data from July. That projected growth rate was at 4% for Q3 until this week, and then took a significant jump up with the reports of this week.

Obviously there is a lot of data that needs to come in for the next 2 months and things are extremely likely not to stay at this torrid pace. But let's talk about the retail sales number, as that had a sizable jump in July.

Retail sales, which are adjusted for seasonality but not inflation, rose 0.7% in July from the prior month, the Commerce Department reported Tuesday. That was a faster pace than the previous month’s upwardly revised 0.3% gain and above economists’ expectations of a 0.4% rise, according to Refinitiv.

Spending rose on nondurable items, such as clothing and sporting goods. Sales at restaurants and bars rose a robust 1.4% in July from June.

Meanwhile, sales of durable goods — defined as products meant to last at least three years — slipped. Sales at furniture stores fell 1.8% in July from June and declined 1.3% at electronics and appliance stores during the same period.

Gas prices recently climbed to their highest level in nearly 10 months, which can influence the Commerce Department’s retail-sales figures. Excluding spending at gasoline stations, retail sales rose 0.8% in July from the prior month.

It’s the “excluding gasoline stations” stat that gives a best indication of what things look like for the consumer, given that gas prices had dropped significantly between July 2022 and July 2023. 0.8% is well above the core increase in inflation of 0.2% for July, and non-gas sales are up a solid 5% over the last 12 months measured. Well above the rate of inflation if you remove the changes in the costs of shelter and gasoline.

And the jump in spending at bars and restaurants continues, up 12.5% in 12 months, and nearly 33% higher than the pre-COVID peak, which is well past the 18% increase in CPI in the same time period.

So people are spending, still getting jobs, but inflation is consistently staying below a 4% annual rate. Seems like a good spot to be in to me, but the Fed still is chasing the inflation ghost, and is concerned by all this good news.

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the meeting summary stated.

That latest increase brought the Fed’s key borrowing level, known as the federal funds rate, to a range targeted between 5.25%-5%, the highest level in more than 22 years.

The quarter percentage point move takes the federal funds rate to a target range of 5.25%-5.5%.

While some members have said since the meeting that they think the further rate hikes could be unnecessary, the minutes suggested caution. Officials noted pressure from a number of variables and stressed that future decisions will be based on incoming data.

“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” the document said.

For what seems to be the 1000th time, I gotta ask “WHAT IS SO MAGIC ABOUT 2% INFLATION?” Is it just because our economy was so slanted in favor of cheap money and limited labor power for the last 20-30 years that these Central Bankers thought that was some kind of “desired new normal” instead of something that wasn’t good for the overwhelming majority of Americans with actual jobs?

This is dumb, and while gas prices have had a recent increase, oil prices recently went back below $80 a barrel for the first time in 2 weeks, and $80/barrel is no different than it was in April. So between that and Summer driving season ending, I would expect gas prices to recede closer to $3 than $4 soon, and there is little food inflation or other factors that would cause it to flare back up.

And the tough talk from some Fed Board members along with the strong economy is not what Wall Streeters want to hear, and so stocks have gone down this week even as things have brightened in the real world. I think it's well past time for the Fed to adjust to the reality that we're living in, and as long as inflation isn't running above 4%, why would we consider raising rates above 5.5%?