Federal Reserve Chairman Jerome Powell has a big problem, and he can't do anything about it.
What's happening: Gasoline prices in the United States, which have fallen for 87 consecutive days, are expected to have driven a slight decline in prices in August compared to July, according to analyst estimates for inflation data scheduled for release Tuesday.
That's good news for cash-strapped consumers. But a drop in prices isn't causing everyone on Wall Street to cheer. Some are starting to use the "D" word: deflation, another form of price instability that's bad for the economy.
The headline number for the Consumer Price Index, a closely-watched inflation gauge, is expected to show that prices actually declined by 0.1% between July and August. (Forecasts still show an 8.1% increase over the past 12 months.)
That might sound like a good thing. But to some, it's cause for concern.
Falling prices can indicate weak demand, and consumer spending is a big portion of the economy. Markets are skittish that the Fed's actions — which take a while to feed through the system — could overshoot, sending the US economy into a prolonged and deep recession.
Deflation can prompt the opposite of what we've seen recently — a downward spiral in jobs and wages as companies cut back production and lay off staff.
Two big names on Wall Street have sounded alarm. Tesla CEO Elon Musk, seemingly tired of his tirades against Twitter, turned to the subject of the central bank, tweeting that "a major Fed rate hike risks deflation."
Musk's tweet came after Ark Invest CEO Cathie Wood also warned about deflation on Wednesday. "The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation," she said.
What the market should remember: "Headline inflation" is called just that because it's the measurement most commonly reported in the media and most familiar to Americans.
But the Fed doesn't look at that number when determining monetary policy — it uses core inflation, which doesn't include food or energy. That metric is expected to increase by 0.3% between July and August, according to Refinitiv. In fact, Powell has said repeatedly that energy prices are not something the Fed can control.
"I think a lot of investors react to headlines or the first paragraph of a story without really getting into the details, and there's a lot of strong movement around the Fed. My strong suspicion is that most investors have never even watched a full [Federal Reserve] press conference," Luke Tilley, chief economist at Wilmington Trust, told me.
And what of Musk and Wood's proclamations on Twitter?
"They're talking their books," Vincent Reinhart, chief economist of Dreyfus-Mellon, told me. If you're a mega equity investor like Elon Musk, you're going to want the Fed to stop hiking.
Reinhart says he's worried about the narrative for another reason. If market participants are wrongly led to believe that the Fed won't tighten that much, then hikes are going to be very disruptive.
"The problem with Musk and Wood speaking this way is that they have a broader reach into society than the people who focus on central banks," he said. "There's a worry that other views will permeate, and they're views that aren't helpful."
The bottom line: Inflation is still near historical highs, and nearly a dozen Fed officials were united in their message last week that rate hikes will continue into the foreseeable future. Core and headline inflation are still much higher year-over-year, and monthly trends are often just noise.
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