Fed getting ready to hike as retail sales, but not inflation, picks up

The Federal Reserve is going to raise the cost of borrowing this week in a move widely anticipated by the money changers on Wall Street. But that’s not the only thing going on.

The latest batch of economic mile-markers will also deliver a peek at how holiday shopping is shaping up and whether inflation is still under lock and key.

The outlook for the holiday season looks good — maybe the best since the Great Recession. Sales got off to a great start on Black Friday weekend, and a massive shift toward online shopping has sent shippers scrambling to catch up. Packages are taking longer to arrive, and it might get worse.

In any case, most economists predict a big increase in retail sales in November. Sales tracker Redbook, for example, reported that sales at stores open at least one year jumped almost 5% in the last week of the month, marking one of the biggest gains in 20 years.

“The holiday shopping season had a strong kickoff to the year,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

One caveat: Gasoline prices usually don’t rise in November, but this time they did. That will make retail sales look even better, even though it puts a dent into the finances of consumers.

While consumer spending keeps the gears of the economy grinding, higher inflation tends to gum up the works. Yet price pressures have been weak for years and even the best efforts of the Fed to boost inflation to a measly 2% over the long run have fallen short.

Inflation as measured by the consumer price index is expected to increase in November, largely because of higher gasoline prices.

The yearly rate of CPI inflation could also move above 2% again, but the problem has been staying there. Inflation has spent most of the past three years well below 2% and there’s no evidence that a major shift is underway.

“All in all, there will be little in the November CPI data to suggest any meaningful build-up of broad based inflation pressures,” said Richard Moody, chief economist at Regions Financial.

Barring a sudden outburst of inflation, the Fed is likely to go slow before it raises interest rates again after its December rate hike.

The central bank is getting a new chairman and several new members, for one thing, and some current Fed honchos are wary of raising rates in the absence of a clear uptick in inflation. They worry an aggressive approach could backfire and harm the economy.

The Fed decision will be announced on Wednesday, and shortly after Chairwoman Janet Yellen will deliver her final post-decision press conference.
Source: MarketWatch

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