A sign advertising rental units is displayed outside a building in Manhattan on April 11, 2024 in New York City.
Spencer Platt | Getty Images
Early data points to inflation trends in the first three months of 2024, and the news so far is, well, not good.
Choose your poison. Regardless of whether it is the prices at the checkout or the input costs in wholesale: Inflation has no longer reached the rapid pace of 2022, but it does not appear to be disappearing any time soon. Expectations for the future have also increased.
Investors, consumers and policymakers – even economists – were surprised at how persistent price pressures were at the start of 2024. Stocks plunged on Friday as the Dow Jones Industrial Average rose nearly 500 points, falling 2.4% for the week and giving up nearly all of its gains for the year.
“Make a fool of me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “We’ve had three months in a row now where print results have been roughly above what everyone expected. It’s time to change the way we think about the future.”
Undoubtedly, the market has been forced to dramatically change its mindset.
Even import prices, an otherwise insignificant data point, contributed to the narrative. In March, it recorded its biggest three-month increase in about two years. All of this caused a major headache for the markets as they saw sell-offs throughout most of the week before really taking a dive on Friday.
As if all the bad inflation news wasn’t enough, a Wall Street Journal report on Friday suggested that Iran is planning an attack on Israel in the next two days, adding to the cacophony. Energy prices, a key driver of inflation readings over the past two months, rose on signs of further geopolitical turmoil.
“You can make your choice. There are many catalysts” for Friday’s selloff, said market veteran Jim Paulsen, a former strategist and economist at Wells Fargo and other firms who now writes a blog for Substack called “Paulsen Perspectives.” “More than anything else, it really depends on one thing now, and if it comes to that, it is the Israeli-Iranian war. … It just gives you a great sense of instability.”
Great hopes were dashed
In contrast, markets earlier in the year saw an accommodative Fed willing to cut rates early and often – six or seven times, starting in March. But given the stubborn data each month, investors have had to recalibrate and are now only expecting two cuts. This is evident from futures market pricing, which sees a non-zero (around 9%) probability of no cuts this year.
“I would like to see the Fed be able to cut interest rates later this year,” said Furman, who was chairman of the Council of Economic Advisers under former President Barack Obama. “But the data is far from there, at least not yet.”
This week has been full of bad economic news, and each day literally brought another dose of reality about inflation.
It began Monday with a consumer survey from the New York Fed that showed expectations for rent increases next year rose dramatically to 8.7%, up 2.6 percentage points from the February survey. Prospects for food, gasoline, medical care and education also rose.
On Tuesday, the National Federation of Independent Business showed that optimism among its members has reached its lowest level in 11 years, with members citing inflation as their top concern.
Wednesday brought a better-than-expected consumer price reading, showing a 12-month inflation rate of 3.5%, while the Labor Department reported Thursday that wholesale prices posted their biggest one-year increase since April 2023.
Finally, a report on Friday suggested that import prices rose more than expected in March, posting their biggest three-month increase since May 2022. Additionally, JPMorgan Chase CEO Jamie Dimon warned that “persistent inflationary pressures” pose a threat to the economy and business. And the University of Michigan’s closely watched consumer sentiment survey came in worse than expected, with respondents also raising their inflation outlook.
Still ready to cut at some point
Fed officials noted the higher readings but did not sound a panic warning, with most saying they still expect a rate cut later this year.
“The economy has come a long way to achieving better equilibrium and achieving our 2 percent inflation target,” said John Williams, president of the New York Fed. “But we have not yet seen the full alignment of our dual mandate.”
Boston Fed President Susan Collins said she expected inflation to also fall “sustainably, albeit unevenly” to 2%, but noted that “it may take longer than I previously thought.” until this happens. Minutes from the Fed’s March meeting released Wednesday showed that officials were worried about higher inflation and were looking for more convincing evidence that it is on a steady downward trend.
While the consumer and producer price indices captured the market’s attention this week, it should be remembered that the Fed’s attention is elsewhere when it comes to inflation. Instead, political decision-makers are guided by the price index for private consumption expenditure, which has not yet been published for March.
There are two key differences between the CPI and PCE indices. The Department of Commerce’s PCE primarily adapts to changes in consumer behavior. So, for example, if people substitute chicken for beef due to price changes, this would be reflected in the PCE rather than the CPI. PCE also places less emphasis on housing costs, an important consideration as rent and other housing prices remain higher.
In February, PCE readings were 2.5% for all items and 2.8% excluding food and energy, the “core” reading that Fed officials are watching more closely. The next release won’t be out until April 26th; Economists at Citigroup said current tracking data suggests core interest rates will fall to 2.7%, which is better but still far from the Fed’s target.
Adding the signals
There are also numerous other signals that suggest the Fed still has a long way to go.
The Atlanta Fed’s so-called sticky price CPI rose slightly to 4.5% on a 12-month basis in March, while the flexible CPI rose a full percentage point, albeit only to 0.8%. Fixed price CPI includes items such as housing, car insurance and medical care, while flexible price focuses on food, energy and vehicle prices.
Finally, in February, the Dallas Fed cut average PCE, which negates extreme values on either side, to 3.1% – again far from the central bank’s target.
One bright spot for the Fed is that the economy has been able to tolerate high interest rates without impacting macro employment or growth. However, there are concerns that these conditions will not last forever and there are signs of cracks in the labor market.
“I have long feared that the last mile of inflation would be the most difficult. There is a lot of evidence of nonlinearity in the disinflation process,” said Furman, the Harvard economist. “If that is the case, you would need adequate unemployment to bring inflation to 2.0%.”
That’s why Furman and others have urged the Fed to reconsider its strong commitment to 2% inflation. BlackRock CEO Larry Fink, for example, told CNBC on Friday that if the Fed can get inflation to around 2.8% to 3%, it should “calm down and win.”
“At least I think it would be perfectly fine to achieve an inflation rate of 2% – 2.49 rounds on two. If she stabilizes there, I don’t think anyone would notice,” Furman said. “However, I don’t think they can tolerate inflation risk above 3 and that is the risk we are currently facing.”
Don’t miss these exclusives from CNBC PRO
Source link
2024-04-13 11:23:16
www.cnbc.com
