Gasoline prices are displayed at a gas station in Chicago, Illinois on March 12, 2024.
Scott Olson | Getty Images
From consumer and wholesale prices to longer-term public expectations, this week’s reports provided multiple reminders this week that inflation isn’t going away anytime soon.
Broader data showed pressures rising faster than expected, sparking fears that inflation could be more persistent than policymakers had expected.
The bad news started on Monday when a survey from the New York Federal Reserve showed that consumer expectations for the longer term had accelerated in February. It continued on Tuesday with news that consumer prices rose 3.2% year-on-year, then culminated on Thursday with a release that suggested pipeline pressures were also increasing at the wholesale level.
These reports will give the Fed plenty to think about when it convenes for a two-day policy meeting on Tuesday, where it will decide on current interest rate levels and provide an updated outlook on where things are headed.
“If the data keeps coming in, it will become increasingly difficult to justify a precautionary rate cut,” wrote Steven Blitz, chief U.S. economist at TS Lombard. Taken together, the numbers show that “the great disinflation has stalled and appears to be reversing.”
The latest spike in inflation came Thursday when the Labor Department reported that the producer price index, a forward-looking measure of pipeline inflation at the wholesale level, rose 0.6% in February. That was double the Dow Jones estimate and sent the 12-month reading up 1.6%, the biggest move since September 2023.
Earlier this week, the department’s Bureau of Labor Statistics said the consumer price index, a widely used measure of the cost of goods and services in the marketplace, rose 0.4% month over month and 3.2% year over year is, with the latter number being slightly higher than prediction.
While rising energy prices contributed significantly to the rise in both inflation figures, there was also evidence of broader pressures from factors such as airfares, used cars and beef.
In fact, at a time when the focus shifted to services inflation, goods prices rose 1.2% in the producer price index, the largest increase since August 2023.
“There continue to be signs in the PPI data that disinflation in goods prices is largely coming to an end,” Citigroup economist Veronica Clark wrote after the report was released.
Overall, stubbornly high prices appear to have affected both consumer expectations and behavior. Although inflation is well below its mid-2022 peak, it has proven resilient despite the Fed’s 11 rate hikes totaling 5.25 percentage points and its moves to reduce its bond holdings by nearly $1.4 trillion.
The New York Fed survey showed three- and five-year inflation expectations rose to 2.7% and 2.9%, respectively. While such surveys are often particularly sensitive to gas prices, this survey showed that energy expectations were relatively steady, reflecting consumers’ doubts that the Fed will soon meet its 2 percent mandate.
On a policy level, this could mean that the Fed could keep interest rates higher for longer than the market expects. Traders in the Fed funds futures market had priced in up to seven cuts totaling 1.75 percentage points at the start of the year; that has since reduced to three cuts.
Combined with the surprisingly strong inflation data, consumers are showing signs of easing their massive shopping spree of recent years. Retail sales rose 0.6%, but that was below estimates and came after a downwardly revised 1.1% decline in January, according to seasonally adjusted figures but not adjusted for inflation.
Last year, sales rose 1.5%, which is 1.7 percentage points below the headline inflation rate and 2.3 percentage points below the core inflation rate excluding food and energy.
Investors will get a glimpse into the mood of policymakers when the Federal Open Market Committee, which sets interest rates, meets next week. The FOMC will release both its interest rate decision – there is virtually no chance of a change in one direction or the other – and its revised outlook for longer-term interest rates, gross domestic product, inflation and unemployment.
Blitz, the TS Lombard economist, said the Fed was right to take a patient approach after officials said in recent weeks that they needed more evidence from the data before moving to cut rates.
“The Fed has time to watch and wait,” he said, adding that “the likelihood that the next move is a rate hike is high.” [are] greater than zero.”
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2024-03-14 19:02:41
www.cnbc.com
