On March 12, 2024, a customer purchased groceries at a grocery store in San Rafael, California.
Justin Sullivan | Getty Images News | Getty Images
The last batch of inflation news Fed officials will see before next week’s policy meeting has been released, and none of it is good.
Overall, the Commerce Department index, which the Fed relies on as a signal of inflation, showed prices continued to rise at a pace that remained well above the central bank’s 2% annual target, according to a separate report this week.
There are several takeaways from this chart: A lot of money is still flowing through the financial system, providing consumers with lasting purchasing power. The fact that shoppers are spending more than they earn is neither sustainable nor deflationary. Finally, consumers are dipping into their savings to fund these purchases, creating an unstable situation, if not now, then in the future.
To sum up, the Fed may be cautious and not in the mood to start cutting interest rates in the short term.
“Just spending a lot of money creates demand, which creates stimulus,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “With unemployment below 4%, it’s not surprising that prices haven’t” fallen. “The spending numbers are not going to come down anytime soon. So inflation is likely to be significant.”
Indeed, data The Bureau of Economic Analysis releases Friday Spending exceeded income in March, as it has been in three of the past four months, while the personal savings rate plummeted to 3.2%, the lowest level since October 2022, data showed.
At the same time, the Federal Reserve’s key indicator for determining inflation pressure – the personal consumption expenditures price index (including all items) rose to 2.7% in March, while the important core indicator excluding volatile food and consumer goods remained at 2.8%. .
A day earlier, the department reported that the core annualized inflation rate in the first quarter was 3.7%, and the overall inflation rate was 3.4%. At the same time, actual gross domestic product (GDP) growth slowed to 1.6%, far below consensus market expectations.
dangerous scene
Stubborn inflation data raises some ominous concerns that The Fed may have to keep interest rates higher for longer than it or financial markets want, threatening a hoped-for soft landing for the economy.
There is an even more chilling threat that if inflation persists, central bankers may have to consider not only keeping interest rates on hold but also raising them in the future.
“Right now, what that means is whether or not the Fed will cut rates, and if (inflation) doesn’t come down, the Fed will either have to raise rates at some point or over a longer period of time,” Fed Chairman LaVolgna said. Keep interest rates higher.” Economist at the National Economic Council under former President Donald Trump. “Is this ultimately going to give us a hard landing?”
Today’s inflation problem in the United States first appeared in 2022, and it has multiple root causes.
At the beginning of the outbreak, the problem came mainly from supply chain disruptions, which Fed officials believe will disappear as epidemic restrictions ease once shippers and manufacturers have a chance to catch up.
But even if the COVID-19 economic crisis is a thing of the past, Congress and the Biden administration continue to spend heavily, with the budget deficit accounting for 6.2% of GDP by the end of 2023. related, not expanded.
In addition, the still active labor market has also led to continued high wage pressure. The number of job vacancies and the number of existing workers once reached 2:1, and currently remains at around 1.4:1.
Now, even as demand shifts from goods to services, inflation remains high and hampers the Fed’s efforts to slow demand.
Fed officials have believed that inflation will slow this year as housing costs fall. While most economists still expect the influx of supply to pull down housing-related prices, other areas are showing up as well.
For example, core personal consumption expenditures excluding housing serve inflation — a relatively new issue in the inflation equation, said Mike Sanders, head of fixed income at Madison Investments. Dubbed the “super core” – it has grown at an annualized rate of 5.6% over the past three months.
Demand that the Fed’s rate hikes were supposed to quell remains strong, helping to drive inflation and signaling the central bank may not have as much power as it thinks to slow price increases.
“If inflation continues to rise, the Fed will face a difficult choice: let the economy go into recession and abandon the soft landing plan, or tolerate inflation above 2%,” Sanders said. “For us, Accepting higher inflation is the more prudent option.”
Worry about hard landing
So far, the economy has managed to avoid the broader damage from the inflation problem, albeit with some glaring flaws.
Credit delinquency rates have reached their highest levels in a decade, and Wall Street is growing increasingly nervous about more volatility ahead.
Inflation expectations are also rising, attracting much attention University of Michigan Consumer Sentiment Survey It shows that the one-year and five-year inflation expectations are 3.2% and 3% respectively, which are the highest levels since November 2023.
JPMorgan Chase CEO Jamie Dimon, who called the U.S. economic boom “incredible” on Wednesday, wrote to the Wall Street Journal the same day that he was worried about all the Government spending all creates inflation, and inflation is more problematic than it actually is.
“That drives a lot of economic growth and may have other consequences called inflation, which may not go away as much as people expect,” Dimon said. “So I would look at the range of possible outcomes. “You can have a soft landing. What I’m more worried about is that it might not be that soft and inflation might not go exactly as people expect.”
Dimon estimates that the market expects a 70% chance of a soft landing.
“I think it’s half,” he said.
About The Author
