Service Inflation, a Spending Divide, and a Fed Ready to Act

SPEAKER_1 (0:00)

Stephen Kates, Economist, Clock Tower Financial, and Brian Mandelbaum, CEO of Attain, which is a real time retail spending analytics platform. It's great to see you both. So I'll start with you, Stephen, some of your thoughts here and reactions to the August CPI.

Stephen Kates (0:19)

Well, I think that there was some fears at the wings that this would be even worse than it was. Now, we were a little bit hotter month over month for core CPI, but this was largely in line. If you go deeper, you do see that services inflation is still rising 3% annually. I think that is the biggest concern, shelter inflation, pushing that in a big way. Oil and gas prices, diesel prices, obviously feeding into some other areas as well, transportation and others.

So there's reasons to be concerned, but overall this was not as bad as it could have been.

SPEAKER_1 (0:57)

Brian, what are your thoughts here as you measure this, maybe in a different way, because you look at it also from the consumer's eyes.

Brian Mandelbaum (1:04)

Yeah, right now we're seeing that there's just two American consumers and they're heading in opposite directions. You look at like the same inflation, two distinct outcomes. Target, for one example, is up, you know, for $50,000 in a year, households are up 2%, same source sales in real terms, but every dollar general income tier is down, some by four and a half, so it's the story about two different American economies.

SPEAKER_1 (1:29)

Yeah, the K-shape economy, as we noted, I mean, you do see folks from the more affluent areas spending, and sometimes they even trade down to the Walmarts and all that, but they do keep things afloat. I mean, within the report, we look at food, energy, shelter, food at home, food away from home, used cars, new cars. What broke down in there, Stephen, as you took a look at that? What stood out to you? Is there anything? Because you mentioned services being somewhat inflationary. We saw that in the PPI too.

Tell me more about some of the components within these reports.

Stephen Kates (2:04)

So as far as some of what consumers are seeing, I think grocery prices and restaurant prices are an interesting dichotomy and dovetail a bit off of what was just said. Because grocery prices are, and they did not, rise a tremendous amount. The constraints on many households, I think, is keeping that rising too quickly. Whereas restaurant prices, those are still rising quickly. Restaurants have a little bit more pricing power. They're certainly feeling the squeeze on ingredients. And they're able to raise prices. We saw that. That's over 3% on an annual basis.

And when we look at services, especially services that are impacted by fuel prices.

So, transportation, airline fares. Those are rising quickly.

And over 20% on an annual basis. That's really where a lot of the rubber meets the road for how gas prices and diesel prices are spreading out to other parts of the economy. This is no longer just a situation where people at the pump are being hurt. That's certainly the case. But this is feeding into other areas. The amount of goods that are shipped around the country from Amazon and Walmart and others, that is going to feed into the prices of those products from those retailers, and we're all participating in that.

SPEAKER_1 (3:26)

Yeah. It looks, Stephen, like the Fed will raise rates next Wednesday. We don't know that. I wanted to ask your opinion in a moment. But Brian, you're looking at the purchases of tens of millions of people actually looking at what consumers are doing, what they're buying, and the behavior every day. And so with that, what's the takeaway here and what they are saying? Obviously, prices are too high. We've heard them say it's sentiment came in lower, weaker than expected.

What are the takeaways on that part of the story here? Because Americans are at least struggling to a certain extent, delinquencies on payments, for example.

Brian Mandelbaum (4:04)

Here's the interesting thing that the headline doesn't really show you.

See, basket size is generally flat everywhere. But the whole gap, what we see in our data, is the trips. Affluent households are keeping up, but everywhere else is skipping. Think about it. I use the dollar general as a greatest example. It's supposed to win when people are trading down. But when people are... The trade down store is not getting traffic. There's nowhere left to trade down to.

SPEAKER_1 (4:33)

Yeah, and I think you make a great point, too. The other thing I'll note is I had a great conversation about McDonald's in the prior show.