On October 4, 2019, Federal Reserve Chairman Powell attended the “Federal Reserve Listening” event held in Washington, DC.
Eric Baradat | AFP | Getty Images
A higher-than-expected consumer price index unnerved markets on Wednesday, but there was buzz about the more specific price measure included in the data – the so-called super core inflation reading.
In addition to headline inflation measures, economists also look at the core consumer price index, which excludes more volatile food and energy prices, to identify real trends. The super core indicator also further excludes housing and rental costs from service readings. Fed officials say it’s useful in the current environment because they view rising housing inflation as a temporary problem rather than a good indicator of underlying prices.
Annual super core growth accelerated to 4.8% in March, the highest level in 11 months.
Tom Fitzpatrick, managing director of global market insights at RJ O’Brien & Associates, said that if you look at the data over the past three months and annualize it, you’ll see that super core inflation is over 8%, Much lower than expected. The Fed’s 2% goal.
“As we sit here today, I think they’re probably freaking out,” Fitzpatrick said.
an ongoing problem
Last month, CPI increased by 3.5% year-on-year, higher than the 3.4% forecast by Dow Jones.data Stocks came under pressure on Wednesday, with Treasury yields rising and prompting futures market traders to extend expectations for the central bank’s first interest rate cut to September from June, CME Group said. Fed Watch Tool.
“At the end of the day, they don’t really care as long as they can get to 2%, but the reality is you can’t get to 2% sustainably without critical cooling of services.” Stephen Stanley, chief U.S. economist at Santander express:
Wall Street has been acutely aware of the trend toward super core inflation since the beginning of the year. The head of U.S. rates at BMO Capital Markets said a rise in January’s consumer price index (CPI) gauge was enough to hinder the market’s “perception that the Fed is winning the battle against inflation, and that this will remain an open question in the coming months.” ”. Strategy Ian Lingen.
Fitzpatrick said another issue facing the Fed is the different macroeconomic backdrop of demand-driven inflation and strong stimulus payments, which will allow consumers to increase discretionary spending in 2021 and 2022 while also pushing higher record inflation levels.
Today’s picture is more complicated, he added, because the most stubborn parts of service-sector inflation are household staples like auto and home insurance and property taxes.
“They’re so scared of what’s going to happen in 2021 and 2022 that we don’t start from the same starting point as we have on other occasions,” Fitzpatrick added. “The thing is, if you look at all of this (together), these None are discretionary spending items, (and) that puts them in a dilemma.”
Sticky inflation problem
Fitzpatrick said the situation was further complicated by falling consumer savings rates and rising borrowing costs, making it more likely the central bank would keep monetary policy restrictive “until something goes wrong”.
He warned that it will be difficult for the Fed to raise interest rates more to reduce inflation because the current drivers are more sticky and less sensitive to tightening monetary policy. Fitzpatrick said the recent rise in inflation is more akin to a tax increase.
Although Stanley believes that the Fed is still far away from further raising interest rates, as long as inflation remains above the 2% target, the Fed may further raise interest rates.
“I think overall inflation is going to come down and they’re going to cut rates later than we think,” Stanley said. “The question is, are we looking at something that’s already entrenched? At some point, I think The possibility of interest rate hikes will come back into focus.”
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