Advertising units for rent are displayed outside a Manhattan building on April 11, 2024 in New York City.
Spencer Platt | Getty Images
Early data points to the path of inflation through the first three months of 2024, and the news so far is not good.
Choose thickness. Whether it's log prices or wholesale input costs, while inflation is far from the blistering pace of 2022, it doesn't look like it's going away anytime soon. Also, future expectations were trending higher.
Investors, consumers, policymakers — and even economists — have been surprised by how stubborn price pressures are heading into 2024. Stocks fell on Friday as the Dow Jones Industrial Average rose nearly 500 points, down 2.4% for the week and surrendering almost all of its gains for the year.
“Fool me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “We've now had three straight months of prints that are higher than everyone expected. It's time to change the way we think about moving things forward.”
There is no doubt that the market has had to change its way of thinking dramatically.
Even import prices, a simple data point, contributed to this narrative. In March, it recorded its largest increase during a three-month period in about two years. All of this has been a huge headache for the markets, which witnessed selling during most of the week before actually pulling back on Friday.
As if all the bad inflation news wasn't enough, a Wall Street Journal report on Friday indicated that Iran is planning to attack Israel in the next two days, adding to the discord. Energy prices, which have been a major factor in inflation readings over the past two months, rose amid signs of more geopolitical turmoil.
“You can take your pick. There are a lot of catalysts” for Friday's selloff, said Jim Paulsen, a former strategist and economist at Wells Fargo and other companies, who now writes a blog for Substack called Paulsen Perspectives. He added: “More than anything else, this is really due to one thing now, which is war between Israel and Iran if that were to happen… It gives you a great sense of instability.”
High hopes were dashed
In contrast, markets heading into the new year have seen the Fed prepare to cut interest rates early and often — six or seven times, with the beginning occurring in March. But with stubborn data each month, investors have had to recalibrate, and now expect just two cuts, according to futures market pricing that sees a non-zero probability (about 9%) of no cuts this year.
“I would like the Fed to be in a position to 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 not close to being there, at least not yet.”
This week has been full of bad economic news, with each day bringing another dose of reality about inflation.
Monday began with a New York Fed consumer survey that showed expectations for rent increases over the next year rising sharply to 8.7%, or 2.6 percentage points higher than the February survey. Expectations for food, gas, medical care and education costs also rose.
The National Federation of Independent Business showed on Tuesday that optimism among its members is at an 11-year low, with members citing inflation as their main concern.
Wednesday brought a higher-than-expected consumer price reading that showed the 12-month inflation rate at 3.5%, while the Labor Department reported Thursday that wholesale prices showed their largest one-year increase since April 2023.
Finally, Friday's report noted that import prices rose more than expected in March and posted the largest three-month advance since May 2022. Furthermore, Jamie Dimon, CEO of JPMorgan Chase, warned that “persistent inflationary pressures” pose A threat to the economy. And business. The closely watched University of Michigan Consumer Confidence Survey came in lower than expected, with respondents also raising their expectations for inflation.
Still ready to cut, sometime
Fed officials noted the higher readings but did not sound panic alarms, with most saying they still expect a cut later this year.
“The economy has come a long way toward achieving better balance and reaching the 2 percent inflation target,” New York Fed President John Williams said. “But we have not seen the full alignment of our dual mandate yet.”
Boston Fed President Susan Collins said she sees inflation “permanently, albeit unevenly” drifting toward 2% as well, but noted that “it may take longer than I previously thought” for that to happen. Minutes released Wednesday from the Fed's March meeting showed that officials were concerned about rising inflation and looking for more convincing evidence that it is on a steady path downward.
While consumer and producer price indices have captured the market's attention this week, it's worth noting that the Fed's attention is elsewhere when it comes to inflation. Instead, policymakers are tracking the PCE price index, which has not yet been released for March.
There are two main differences between the Consumer Price Index and the Personal Consumption Expenditures Index. Primarily, the Commerce Department's PCE index adjusts to changes in consumer behavior, so if people are substituting beef for chicken, for example, due to price changes, this will be more reflected in the CPI than in the CPI. Also, PCE places less weight on housing costs, an important consideration as rents and other shelter prices rise.
In February, PCE readings were 2.5% for all items and 2.8% excluding food and energy, or the “core” reading that Fed officials are closely monitoring. The next release doesn't come until April 26; Economists at Citigroup said current tracking data suggests a core decline to 2.7%, which is better but still far from the Fed's target.
Add up signals
Moreover, there are many other signs that show that the Fed has a long way to go.
The so-called fixed-rate CPI, according to calculations by the Federal Reserve Bank of Atlanta, rose to 4.5% on a 12-month basis in March, while the flexible CPI rose a full percentage point, albeit to just 0.8%. The fixed-rate CPI includes items such as housing, auto insurance, and medical care services, while the flexible-rate is concentrated in food, energy, and vehicle prices.
Finally, the Dallas Fed trimmed average personal consumption expenditures, which led to extreme readings on both sides, to 3.1% in February — again far from the central bank's target.
The bright spot for the Fed is that the economy has been able to withstand higher interest rates, with little impact on the employment or growth picture at the macro level. However, there is concern that such conditions will not last forever, and there have been signs of cracks in the labor market.
“I've always been concerned that the last mile of inflation is going to be the hardest,” said Forman, the Harvard economist. “There's a lot of evidence of non-linearity in the process of disinflation.” “If that were the case, you would need a fair amount of unemployment to get inflation to 2.0%.”
That's why Furman and others have pushed the Fed to rethink its firm commitment to 2% inflation. For example, BlackRock CEO Larry Fink told CNBC on Friday that if the Fed can raise inflation to about 2.8%-3%, it should “view it as a day and a victory.”
“At the very least, I think getting somewhere around 2% inflation would be good — roughly 2.49 to two,” Foreman said. “If it stays there, I don’t think anyone will notice.” “I don't think they can take the risk of inflation above 3, and that's the risk we're facing now.”
