Pre-market stocks: The Fed is fighting inflation. Could deflation be his next fight?

A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber? You can subscribe right here. You can listen to an audio version of the newsletter by clicking on the same link.


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Federal Reserve Chairman Jerome Powell has a big problem and can’t help it.

US gasoline prices, which have fallen for 87 consecutive days, are expected to have caused prices to drop slightly in August compared to July, according to analysts’ estimates for inflation data scheduled for release on Tuesday.

This is good news for cash-strapped consumers. But a drop in prices isn’t making everyone on Wall Street cheer. Some are starting to use the “D” word: deflation, another form of price instability that is bad for the economy.

What is happening: The main number in the Consumer Price Index, a much-followed indicator of inflation, is expected to show that prices actually fell by 0.1% between July and August. (Forecasts still show an 8.1% increase over the past 12 months.)

It might sound like a good thing. But for some it is a cause for concern.

Falling prices may indicate weak demand and consumer spending is an important part of the economy. Markets are skittish that Fed stocks – which take some time to fuel the system – can get over, sending the US economy into a protracted and deep recession.

Deflation can result in the opposite of what we have seen recently: a downward spiral of jobs and wages as companies cut production and lay off staff.

Two big names on Wall Street have sounded the alarm. Tesla CEO (TSLA) Elon Musk, apparently tired of his rants against Twitter, turned to the central bank argument, tweeting that “a major Fed rate hike risks deflation.”

Musk’s tweet came after Ark Invest CEO Cathie Wood also warned on Wednesday’s deflation. “The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation,” she said.

What the market should remember: “Stock inflation” is called just that because it is the measure most commonly reported by 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. This metric is expected to increase 0.3% between July and August, according to Refinitiv. In fact, Powell has repeatedly stated that energy prices are not something the Fed can control.

“I think many investors react to the headlines or the first paragraph of a story without really going into detail, and there are a lot of strong moves around the Fed. My strong suspicion is that most investors have never even looked at a. entire [Federal Reserve] press conference, ”Luke Tilley, chief economist at the Wilmington Trust, told me.

And what about Musk and Wood’s Twitter proclamations?

“They are talking about their books,” Vincent Reinhart, chief economist at Dreyfus-Mellon, told me. If you’re a mega stock investor like Elon Musk, you’ll want the Fed to stop hiking.

Reinhart says he’s worried about fiction for another reason. If market participants are mistakenly led to believe the Fed won’t tighten that much, the upside will be very disruptive.

“The problem with Musk and Wood talking like this is that they have a wider reach in society than people who focus on central banks,” he said. “There is concern that other points of view will permeate, and they are points of view that are not useful.”

Bottom line: Inflation is still close to all-time highs, and nearly a dozen Fed officials joined in last week’s message that rate hikes will continue for the foreseeable future. Core and headline inflation is still much higher year-on-year and monthly trends are often just loud.

The US credit card industry is taking long-sought action on illegal arms sales.

American Express (AXP), Mastercard and Visa have announced that they will adopt a new merchant class code for the nation’s arms dealers, my colleague Ramishah Maruf reports.

The system will classify sales in gun and ammunition stores separately, which can help track suspicious firearms and ammunition transactions. Gun control activists say the change will help signal potential mass shooters and arms traffickers.

The Geneva-based International Organization for Standardization approved the code on Friday. Almost all retail items have a merchant category code, but prior to Friday’s decision by ISO, gun store sales were classified into a category of general merchandise or sporting goods.

The proposal was first suggested by DealBook’s Andrew Ross Sorkin in 2018 following the Parkland shooting.

Visa (V) and Mastercard (MA) initially opposed the creation of the code, although some of their own executives spoke in favor. Visa (V) said at the time that he did not consider himself a “moral authority”.

Visa reversed course last week. In a statement on Sunday, the world’s largest payment network said it “will move forward with the next steps making sure we protect all legal trade on the Visa network in accordance with our longstanding rules.”

There have been 479 mass shootings in the United States in 2022 so far, according to Gun Violence Archive, a non-profit research group.

Those were tough years for Burger King, my colleague Danielle Wiener-Bronner reports.

The company is playing a game of catch-up against its competitors after missteps made during the pandemic have left it lagging behind other fast food realms.

At the height of Covid-related closures, restaurants streamlined menus and streamlined their online ordering systems to meet increased demand. Burger King didn’t.

Burger King, which is owned by Restaurant Brands International (QSR), admits this. “In fact, we complicated things,” RBI CEO Jose Cil told CNN Business, “we added menu items … that were more difficult and not necessarily intuitive and typical for us to serve.”

In the second quarter of this year, sales of Burger King restaurants in the United States that have been open for at least 13 months grew by only 0.4%. Sales of McDonald’s restaurants in the United States that have been open for at least 13 months increased 3.7% during that period.

But there is a turnaround plan: Burger King plans to refurbish around 800 restaurants over the next two years. The fast food chain says it will invest $ 400 million to improve the brand: $ 250 million will go to restaurant technology upgrades, kitchens and renovations, and $ 150 million to advertising and digital products. Franchisees will also invest in brand improvement.

The August U.S. Consumer Price Index is released at 8:30 am ET.

Also today

▸ Starbucks Investors Day (SBUX).

▸ Twitter Shareholders’ Meeting (TWTR) to vote on the acquisition of Elon Musk

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