On April 11, 2024, a board advertising rental units was posted outside a building in Manhattan, New York City.
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Early data shows the path of inflation through the first three months of 2024, but the news so far is not good.
Choose your poison. Whether it’s registered prices or wholesale input costs, while inflation is no longer as rapid as it was in 2022, it doesn’t appear to be going away any time soon. Future expectations have also been moving higher.
Investors, consumers and policymakers – even economists – were caught off guard by stubborn price pressures starting in 2024. Stocks tumbled on Friday, with the Dow Jones Industrial Average up nearly 500 points and almost capitulating after falling 2.4% for the week. All earnings throughout the year.
“Fool me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “Now we’ve been receiving the above print for three months in a row, and it’s pretty much in line with every Personal expectations. It’s time to change the way we think about things to come.”
There is no doubt that the market has been forced to change its thinking significantly.
Even the otherwise minor data point of import prices contributes to the narrative. In March, the index posted its largest three-month gain in about two years. All of this created a major headache for the market, which sold off for much of the week before really getting into trouble on Friday.
As if all the bad news about inflation wasn’t enough, The Wall Street Journal reports Iran said on Friday it planned to attack Israel within the next two days, adding to the discord. Energy prices have been a major factor in inflation data over the past two months, moving higher amid signs of further geopolitical instability.
“You have a choice. There were a lot of catalysts for Friday’s sell-off,” said market veteran Jim Paulsen. He is a former strategist and economist at Wells Fargo and other companies, and now writes a blog titled “Paulsen Perspectives” for Substack. “The bottom line is, right now it really depends on one thing, if that happens, which is a war between Israel and Iran… It just gives you a big sense of instability.”
High hopes dashed
In contrast, entering this year, the market saw that the accommodative Federal Reserve was preparing to cut interest rates early and often – six to seven times, and the rate cut occurred in March. But because the data every month is very stubborn, investors have to readjust, According to futures market pricing, only two interest rate cuts are currently expected, and the probability of no interest rate cuts this year is non-zero (about 9%).
“I hope the Fed will cut interest rates later this year,” said Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “But the data is still far from expectations, at least for now.”
This week has been filled with bad economic news, and each day brings another reality about inflation.
A consumer survey from the New York Federal Reserve Bank that began on Monday showed expectations for rent increases next year rose sharply to 8.7%, 2.6 percentage points higher than the February survey. The outlook for food, gas, health care and education costs is also higher.
On Tuesday, the National Federation of Independent Business showed optimism among its members, which cited inflation as their top concern, fell to an 11-year low.
Consumer price data on Wednesday came in higher than expected, showing 12-month inflation at 3.5%, while the Labor Department reported on Thursday that wholesale prices posted their largest one-year gain since April 2023.
Finally, a report on Friday showed that import prices rose more than expected in March, recording the largest three-month rise since May 2022. On top of this, JPMorgan CEO Jamie Dimon warned that “ongoing inflationary pressures” pose a threat to the economy and business. The University of Michigan’s closely watched consumer confidence survey came in lower than expected, with respondents raising their inflation outlook.
Still ready to cut sometimes
Fed officials noted the higher data but stopped short of sounding panic alarms as most said they still expected a rate cut later this year.
“The economy has made great progress toward achieving better balance and achieving our 2 percent inflation goal,” said New York Fed President John Williams. “But we have not yet seen complete alignment of our dual mandates.”
Boston Fed President Susan Collins said she expected inflation to fall back to 2% “on a sustained basis, albeit unevenly,” but noted that “it may take more time than I previously thought.” can be achieved.Minutes of the meeting released on Wednesday Data from the March Fed meeting showed officials are concerned about rising inflation and are looking for more convincing evidence that inflation is steadily moving lower.
While consumer and producer price indexes have captured the market’s attention this week, it’s worth noting that the Fed’s attention is elsewhere when it comes to inflation. Policymakers turned to the yet-to-be-released personal consumption expenditures price index for March.
There are two main differences between the CPI and PCE indexes. Mainly, the Commerce Department’s personal consumption expenditures adjust for changes in consumer behavior, so if people are substituting chicken for beef because of price changes, that will be reflected more in personal consumption expenditures than in consumer prices. in the index. Additionally, the PCE places less emphasis on housing costs, an important consideration as rents and other home prices continue to rise.
In February, the PCE reading for all items, excluding food and energy, the “core” reading that Fed officials watch more closely, was 2.8%. The next version will not be released until April 26; Citigroup economists said that current tracking data shows that the core interest rate dropped to 2.7%, which is better, but still far from the Fed’s goal.
add signals
In addition, there are multiple other signals that the Fed still has a long way to go.
So-called Sticky price CPIInflation edged up to 4.5% in the 12 months in March, while elastic CPI surged a full percentage point, albeit by just 0.8%, according to Atlanta Fed calculations. Sticky price CPI involves items such as housing, motor vehicle insurance and medical services, while flexible prices focus on food, energy and automobile prices.
at last, Dallas Fed lowers personal consumption expenditures averageIn February, both sides gave an extreme figure of 3.1% – again a far cry from the central bank’s target.
One bright spot from the Fed is that the economy can tolerate high interest rates with little impact on employment conditions or macro-level growth. However, there are fears this won’t last forever and there are already signs of cracks in the labor market.
“I have long been concerned that the last mile of inflation will be the most difficult. There is substantial evidence of nonlinearity in the deflationary process,” said Furman, an economist at Harvard University. “If that’s the case, it would take a significant amount of unemployment to get inflation all the way up to 2.0%.”
That’s why Furman and others are urging the Fed to reconsider its firm commitment to 2% inflation. For example, BlackRock CEO Larry Fink told CNBC on Friday that if the Fed can get inflation to around 2.8%-3%, then it should “stop there and win.” ”.
“At the very least, I think it would be good to get to 2 percent inflation — 2.49 to round 2. If it holds steady there, I don’t think anyone will notice it,” Furman said. “However, I don’t think they can tolerate the risk of inflation exceeding 3, which is the risk we face now.”
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