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The Fed is blaming low inflation on 'very, very low' apparel prices

The Federal Reserve is having trouble stimulating higher prices, and the central bank is blaming shirts, pants, and dresses — maybe your shoes, too.

The Fed has a 2% inflation target, a level that policy makers feel is low enough to contain hyperinflation but high enough to ensure healthy consumption levels. In April, the Fed’s most preferred reading of inflation — core personal consumption expenditures (PCE) — clocked in at 1.6%, which Chairman Jerome Powell noted as “running below” the central bank’s target.

Powell said the reading, which strips out volatile prices of food and energy, was the result of “transitory” factors like portfolio management services and airline tickets. Powell also highlighted “very, very low” apparel prices, suggesting ultimately that all of these temporary drags would “turn around” and return inflation to levels closer to 2%. Other Fed speakers have echoed Powell’s point, adding that footwear has also been a drag.

But industry contacts say that clothing prices are trending down amid an aging population and other long-term trends, suggesting that lower clothing costs may be more than “transitory.”

Although just a piece of the inflation puzzle, changes in the price of clothes could have policy implications for a Fed that has been sensitive to inflation in setting its rate path. Worries of runaway inflation pushed the Fed to raise rates four times during 2018, but concerns over failing to push inflation to 2% have made the case for pausing on rates or even cutting rates.

Cheaper clothes

The price of clothing is most closely measured in the Consumer Price Index collected monthly by the U.S. Bureau of Labor Statistics — this measure tends to report higher inflation than PCE. The most recent reading of prices in the month of April showed apparel prices falling sharply, by a seasonally-adjusted 2.9% year-over-year.

Apparel prices - which covers clothing, footwear, jewelry, and watches - have trended lower than the Consumer Price Index for all items over the past few years (Credit: David Foster / Yahoo Finance)

But the story for apparel prices — in addition to footwear prices — has been a steady downward trend over the last few years. Jay Sole of UBS told Yahoo Finance that is nothing new, and reflects the deflationary nature of an industry built mostly on discretionary spending.

“People need to buy food, but people don’t need to have a new pair of shoes,” said Sole.

An aging U.S. population is also weighing down on the longer-term prospects for discretionary spending. A Morgan Stanley report April 26 noted that apparel will be the biggest casualty of an older population that cares less about fashion, estimating that they expect a “growth headwind” for spending on clothes over the next 10 years as those older than 65 become a larger part of the population.

Sole also argues that a healthy amount of competition is driving down prices, as a plethora of brands jockey for position. In footwear, for example, fewer items in the marketplace command a premium price — aside from coveted items like a retro Air Jordan 11 or pair of Adidas Yeezys.

A model wears a pair of Adidas Yeezy 750 Boost shoes designed by Kanye West as part of his Fall/Winter 2015 partnership line with Adidas at New York Fashion Week, U.S. February 12, 2015. Picture taken February 12, 2015. REUTERS/Lucas Jackson/File photo

"There's a lot of great brands out there, but you know, I think that's the point,” Sole said. “There's a lot of great brands so people can find a cheaper substitute.”

Sole pointed out that over the last 50 years, apparel prices are down about 80% on an inflation-adjusted basis, as measured in the Consumer Price Index.

Data collection

As markets continue to work through the Fed’s thinking on inflation, Boston Fed President Eric Rosengren has doubled down on Powell’s view of inflationary pressures as “transient.”

In a speech in New York on Tuesday, Rosengren said price declines in both clothing and footwear were “notable” but had a curious explanation for the sharp drop in April.

“This movement reflects, in part, changes in the way the government collects information on apparel prices, a change that presumably does not reflect underlying pricing trends,” Rosengren said.

In general, the BLS sends staff to a store location or to a store’s website to record prices. But one large retailer decided that it no longer wanted BLS staff combing its physical stores, and instead offered to send a dataset with more than 1000 price quotations from each location in the geographic areas covered by the CPI. The new numbers from “CorpX” were integrated into the CPI beginning with the March data.

Steve Reed, an economist at the BLS, told Yahoo Finance that the dataset is an improvement because it reflects prices at which consumers are actually purchasing the goods, as opposed to online prices that may not align with the price tag on the store shelf.

While Reed said that the inclusion of CorpX data was a “substantial change,” he clarified that there is no clear upward or downward bias to how that data affects the overall apparel trend.

“The impact on the monthly changes was not statistically significant,” Reed said, adding later that the switch in data collection was of “very small, relative importance.”

The BLS actually had CorpX provide historical data so that when the March CPI began incorporating the new data, prices from the company-provided datasets were not being compared to prices collected from the web, for example.

Still, Reed said there’s a high variance to apparel prices given the seasonality of the business. But he echoed the sentiment of other analysts in saying that “apparel is not a place we see a lot of inflation.”

For the Fed, the credibility of blaming low inflation on clothing depends on the time horizon. In the short-term, tariffs could push clothing prices up given the sensitivity of the business to supply chain changes. But Sole says the long-term story of price declines remains the dominant narrative.

“I think the trend is going to continue,” Sole said.


Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter
@bcheungz.

Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade

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