U.S. retailers cut prices but services keep inflation hot

WASHINGTON, June 9 (Reuters) – Major U.S. retailers like Target Corp (TGT.N) and Walmart Inc (WMT.N)have been cutting prices to clear overstocked warehouses, but hotel revenue is pouring in as daily room rates and occupancy have broken above pre-pandemic levels.

Used car prices are no longer surging at the chart-topping pace that drove an initial surge of COVID-era inflation; but airline fares as of April were rising at a stratospheric 33% annual rate.

The price of restaurant meals is accelerating, but with no break apparent yet in demand according to data from reservation site OpenTable.

The Federal Reserve and the Biden administration had believed the expected rotation of spending from a COVID-lockdown splurge on goods to in-person services would take the edge off of price increases. Services, after all, are affected less by the supply-chain bottlenecks that kept goods off of shelves and fueled price rises through scarcity.

Instead, the two sides of American consumption are so far seeing a handoff in inflation pressure, with the more wage-sensitive service industry competing for workers to fill vacancies well above the national job opening rate.

For the Fed, as well as Democrats worried inflation will cost them at the mid-term polls in November, the “great rotation” so far is providing no easy fix.

“A rise in consumption back towards services may not help much,” given higher labor demand and higher wage growth in the service industry, said Harry Holzer, a Georgetown University economics professor and Brookings Institution fellow. “Wage inflation there is stronger in a range of sectors from the low end…to the high end” – from restaurant workers to well-paid professionals.

New consumer inflation data due Friday is expected to show headline prices rose by 8.3% annually, a multi-decade price shock that has cut Americans’ purchasing power, boosting food costs and pushing gasoline near $5 a gallon.

The Fed uses a slightly different measure for its 2% inflation target, but it is running at 6%, causing the Fed to engineer one of its fastest-ever turns toward tighter monetary policy, with President Joe Biden’s blessing in hopes prices will ease soon.

‘OPTIMISTIC FOR THE CONSUMER’

Within the headline number, the subtext may be more troublesome.

Inflation for goods has eased as expected, with demand falling and growing evidence that supply-chain problems are improving.

Shipping costs and port backlogs are easing, and supply chain indices from both the New York Fed and Oxford Economics eased through May.

Monthly e-commerce data from Adobe, released Thursday, showed inflation for goods purchased online eased in May to a 2% annual rate, down from a March peak of 3.6%. Prices fell on a month to month basis for 10 of the 18 categories tracked by the company. Rising online prices were a hallmark of the COVID goods binge.

But services are taking up the slack. Excluding energy-related services, inflation for “core” services has accelerated for eight months straight, and their share of overall inflation has risen also.

So far, that has not clearly dented consumer spending,…