A customer shops for food at a grocery store on March 12, 2024 in San Rafael, California.
Justin Sullivan | Getty Images News | Getty Images
The latest batch of inflation news that Federal Reserve officials will see before next week's monetary policy meeting has arrived, and none of it has been very good.
Overall, the Commerce Department indicators that the Fed relies on for inflation signals showed prices continuing to rise at a rate well above the central bank's annual target of 2%, according to separate reports this week.
Within this picture came several salient points: The abundance of money still flowing through the financial system gives consumers permanent purchasing power. In reality, shoppers are spending more than they are getting, which is an unsustainable situation that does not lead to price deflation. Finally, consumers are resorting to using their savings to finance these purchases, creating a risky scenario, if not now then in the future.
Putting it all together, we add that the Fed is likely dovish and in no mood anytime soon to start cutting interest rates.
“Just spending a lot of money creates demand, it creates stimulus,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “With unemployment below 4%, it should not be a surprise that prices are not falling.” “Spending numbers are not going to come down anytime soon. So you may have a difficult inflation scenario.”
In fact, data released by the Bureau of Economic Analysis on Friday indicated that spending outpaced income in March, as it has in three of the past four months, while the personal saving rate fell to 3.2%, its lowest level since October 2022.
Meanwhile, the Personal Consumption Expenditures price index, the Fed's main measure in determining inflation pressures, rose to 2.7% in March when it includes all items, and held steady at 2.8% for the vital core measure that excludes more volatile food and food industries. Energy prices.
The previous day, the ministry reported that annual inflation in the first quarter reached a core rate of 3.7% in the first quarter overall, and 3.4% on the headline basis. This came as real GDP growth slowed to 1.6%, which is much lower than agreed-upon estimates.
Risk scenarios
The stubborn inflation data has raised several ominous specters, specifically that the Fed may have to keep interest rates high for longer than financial markets want or desire, threatening a hoped-for economic downturn.
A more worrying threat is that if inflation persists, central bankers may have to consider not only keeping interest rates where they are, but also considering raising interest rates in the future.
“Right now, that means the Fed won't cut interest rates, and if (inflation) doesn't come back, the Fed will either have to raise interest rates at some point or keep interest rates high,” said LaVorgna, who was Fed chairman. “For a longer period.” Economist for the National Economic Council under former President Donald Trump. “Does this finally give us a hard landing?”
The inflation problem in the United States today first appeared in 2022, and had multiple sources.
Early in the crisis, problems came largely from supply chain disruptions that Fed officials believed would go away once shippers and manufacturers had a chance to catch up as pandemic restrictions eased.
But even with the Covid economic crisis in the rearview mirror, Congress and the Biden administration continue to spend lavishly, with the budget deficit reaching 6.2% of GDP at the end of 2023. This is the highest outside the Covid years since 2012. The level is generally associated with an economic downturn, not With expansions.
Moreover, a still-crowded labor market, with job openings outnumbering available workers at one point by a 2-to-1 margin and still at about 1.4-to-1, has also helped keep wage pressures high.
Now, even as demand shifts from goods to services, inflation remains high and is confounding the Fed's efforts to slow demand.
Fed officials believed inflation would decline this year as housing costs fell. While most economists still expect the influx of supplies to drive down shelter-related prices, other areas have emerged.
For example, core PCE inflation excluding housing — a relatively new wrinkle in the inflation equation nicknamed “supercore” — has averaged an annualized 5.6% over the past three months, according to Mike Sanders, head of fixed income at Madison Investments.
Demand, which the Fed was supposed to dampen by raising interest rates, has remained strong, helping to drive inflation and suggesting that the central bank may not have as much authority as it thinks to moderate the pace of rate increases.
“If inflation remains high, the Fed will face a difficult choice between pushing the economy into recession, abandoning the soft landing scenario, or tolerating inflation above 2%,” Sanders said. “For us, accepting higher inflation is the wisest choice.”
Fears of a hard landing
So far, the economy has managed to avoid the broader damage caused by the inflation problem, although there are some noticeable cracks.
Credit defaults have reached their highest level in a decade, and there is growing concern on Wall Street that there is more volatility ahead.
Inflation expectations are also on the rise, with the closely watched University of Michigan Consumer Confidence Survey showing inflation expectations for one and five years respectively at annual rates of 3.2% and 3%, the highest level since November 2023.
No less than a source from JPMorgan Chase CEO Jamie Dimon wavered this week from calling the U.S. economic boom “unbelievable” on Wednesday to a daily letter telling the Wall Street Journal that he was concerned that all the government spending was creating… Inflation is more difficult than it is now. Currently appreciated.
“That's driving a lot of this growth, and that will have another consequence perhaps down the road called inflation, which may not go away as people expect,” Dimon said. “So I'm looking at a range of possible outcomes. There could be this soft landing. I'm a little more concerned that it might not be so soft and that inflation might not go the way people expect,” he added.
Dimon estimated that markets estimate the chances of a soft landing at 70%.
“I think it's half that,” he said.