'Sticky' inflation is still high but that is a good sign for the health of the economy

• Retail sales in September were higher than expected even though inflation is still high.
• This will slow down the Fed's goal of reaching 2% inflation.

Interest rates are still elevated and inflation is higher than anybody would like, but there are signs that the goal of a soft landing for the economy is working.

As interest rates skyrocketed over the last 18 months, inflation fell from a 40-year high during the summer of 2022. But now, the drop has stalled as inflation is proving to be sticky — consumer prices rose 3.7% over the year in September, the same higher-than-desired rate as in August.

But one factor propping inflation up is actually good news: The American consumer still has money to spend and is doing just that.

While Americans splurged over the summer on experiences, now we see that even retail sales are stronger than expected.

Retail sales, including clothing stores, pharmacies, groceries, and new cars, were up 0.7% in September, much higher than the expected 0.3% monthly gain. That was also the sixth straight month of growth.

So, why are people spending so much money when the economy still faces so many pressures from all angles? Simple: They still have jobs.

This was the message delivered by Solus Alternative Asset Management's chief strategist, Daniel Greenhaus, during a Tuesday appearance on CNBC's "Last Call."

"At the end of the day, people have jobs, they're making money," Greenhaus said. "They have more money in net worth today. And as long as they are working, all this other stuff is bearable."

Unemployment is still low at 3.8% and the US added 187,000 nonfarm payrolls in August, more than July's revised growth. Meanwhile, the percentage of the working-age population with a job has remained near highs not seen since the late '90s.

Former PIMCO chief economist and current professor at Georgetown's School of Business, Paul McCulley, was a guest on CNBC's "Fast Money" and also pointed to the job market as to why the "consumer is strong, period."

"It's important to note that we are seeing disinflation in wages, and that's a key part in the soft-landing story," McCulley said. "What we are not seeing is a sharp deceleration in job growth. People may not be getting outsized raises, but they are getting jobs and keeping jobs. And I think that is the sturdy portion of our economy, and there is every reason to expect it to continue sturdy."

A new normal

Yes, there are a lot of pain points in the economy: student loans suck for many Americans, things cost more, it is not a great time to borrow money for things like houses, and credit card debt is soaring. But when it comes to day-to-day needs and wants, people are still willing to spend money because they are still making money.

This could also be a sign that Americans are adjusting to a new normal in the post-pandemic world. Wells Fargo Senior Economist Tim Quinlan stressed this point in a note on Tuesday.

"Pandemic-related sources of spending like excess savings and easy access to cheap credit are fading, but what this report tells us is that households have grown more comfortable spending at elevated rates," Quinlan wrote.

McCulley echoed this when asked if strong retail sales are sign that the economy is not coming in for a soft landing.

"I think when you look at the retail sales in isolation, you can say, 'no landing,'" McCulley said. "But when you are looking at the overall mosaic of data, I think we are seeing a landing, or a normalization, if you will, post-pandemic."

The landing is coming, but it is taking longer

It is a good thing that Americans still have jobs, but it would still be better if inflation came down to the Fed's goal of 2.0%. In the short term, further declines in inflation could be difficult if people are spending money they saved during the pandemic.

"There's no question it's harder to get inflation under control when you have a bunch of wealthy consumers who didn't spend during Covid," Richmond Fed President Tom Barkin said Tuesday.

This means we are more likely to see higher-for-longer interest rates as the Fed continues to try to slow the economy with higher borrowing costs.

Philadelphia Fed President Patrick Harker noted during a Tuesday interview that interest rates could just stay at their current level for a while without seeing either more hikes from the central bank this year or cuts in the near future.

"This is the time where we just sit for a little bit," Harker said. "It may be for an extended period; it may not. But let's see how things evolve over the next few months."

Strong consumer spending is a good sign, but the economy is not out of the woods yet.

The risk is that some companies won't be able to survive higher-for-longer interest rates, which could subsequently spill over into the job market. But as long as Americans have jobs, they will spend money.

"We have long stressed that real income is the last major driver of spending, and continued labor market tightness suggests income can continue to fuel consumption in the near term," Quinlan wrote. "In fact, the only thing that looks to break the back of this consumer would be weakness in the labor market.