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Friday, June 10, 2022

Today's newsletter is by Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter.

In recent weeks, retailers ranging from Target (TGT) to Gap (GPS) and Kohl’s (KSS) have admitted they loaded up on too many goods consumers no longer want.

And while the Fed is looking for lower prices to slow inflation, clothing sales alone aren’t going to cut it.

On Friday morning, the BLS will release the Consumer Price Index for May. Heading into the print, economists expect headline inflation rose 8.3% over last year, a rate that remains near 40-year highs.

Retailers’ woes have spooked markets and bolstered some arguments the economic recovery is starting to show cracks. Discounts to move through swollen inventories have been announced by some retailers, and appear increasingly likely for others.

But don’t expect retail markdowns to make a dent in inflation.

“If someone tells you recent news that some retailers are discounting clothes will have any measurable effect on CPI, ignore them,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note Thursday. “Retailers could give clothes away for free and U.S. inflation would still be over 5%.”

In other words, even if apparel was entirely removed from the CPI calculation, because of its 2.5% weight in the index, headline inflation would still be over 5%. In plain English, Colas is simply noting that cheaper apparel won’t really help bring inflation back toward the Fed’s 2% target.

For personal consumption expenditures (PCE) — the Fed’s preferred inflation gauge — the “clothing and footwear” category maintained a slightly higher 2.9% weight during the first quarter.

In CPI, components’ weights, or "relative importance," correspond roughly with estimated shifts in consumer spending across categories as prices change. The much bigger contributors to headline inflation, then, are the goods and services that create the largest changes in consumer behavior.