All the data shows inflation isn’t going away, making things tough on Fed

The last of the inflation news that Federal Reserve officials will see before their policy meeting next week has arrived, and none of it is good.

Overall, the Commerce Department indicators that the Fed relies on to detect inflation signals show that prices continue to rise at a rate that still far exceeds the central bank's 2% annual target, according to reports. this week alone.

In that picture, several things stand out: The abundance of money still flowing through the financial system is giving consumers lasting purchasing power. In reality, shoppers are spending more than they are getting, a situation that is neither sustainable nor effective in reducing inflation. Ultimately, consumers are having to dip into their savings to pay for those purchases, creating a precarious scenario, if not now then later.

Taken all together, that suggests the Fed is likely to be cautious and not in the mood to start cutting interest rates anytime soon.

“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's not surprising that prices haven't fallen. “Spending numbers are not going down anytime soon. So you could have a difficult inflation scenario.”

Indeed, data The Bureau of Economic Analysis announced Friday showed spending outstripped income in March, as it has in three of the past four months, while the personal savings rate fell to 3.2%, its lowest since October 2022.

Simultaneously, Personal consumption expenditure price indexThe Fed's key gauge in determining inflationary pressures, rose to 2.7% in March when all items were included and held at 2.8% for a key core measure that helps eliminating more volatile food and energy prices.

A day earlier, the ministry reported that annual inflation in the first quarter totaled 3.7% in the first quarter and 3.4% on a general basis. That comes as real gross domestic product growth slowed to a 1.6% pace, well below consensus estimates.

The persistent inflation data has raised some ominous specters, namely The Fed may have to keep interest rates high longer than it or financial markets want, threatening the hoped-for soft economic landing.

There's an even scarier threat: if inflation becomes truly persistent, central banks may have to consider not only leaving interest rates unchanged, but also keeping interest rates unchanged. contemplate future trips.

“For now, that means the Fed won't cut interest rates and if [inflation] “Does that ultimately give us an unavoidable chance the Fed will have to raise interest rates at some point,” said LaVorgna, chief economist of the National Economic Council under former President Donald Trump. or keep interest rates higher for a longer period of time.” Difficult landing?

The current inflation problem in the US first appeared in 2022 and has many origins.

At the start of the outbreak, the problems largely stemmed from supply chain disruptions that Fed officials said would disappear as shippers and manufacturers had a chance to catch up as coronavirus restrictions eased. The pandemic is eased.

But even as the Covid economic crisis is clear, Congress and the Biden administration continue to spend lavishly, with the budget deficit at 6.2% of GDP as of the end of 2023. the highest outside of Covid years since 2012 and a level typically associated with recessions, not expansions.

Above all, The labor market is still bustlingwhere job opportunities outnumber available workers at any one time by a ratio of 2 to 1 and remain at about 1.4 to 1, also helping to maintain high wage pressures.

Currently, even as demand shifts from goods to services, the normal state of the US economy, inflation remains high and is hindering the Fed's efforts to reduce demand.

Fed officials had thought inflation would ease this year as housing costs fell. While most economists still expect the influx of supply to pull down housing-related prices, other regions are seeing price increases.

For example, core PCE services inflation excluding housing – a relatively new addition to the inflation equation nicknamed “super core” – has been running at 5.6% annualized over the past three months, according to Mike Sanders, head of fixed income at Madison Investments.

Demand, which the Fed's rate hikes were supposed to quell, remained strong, helping fuel inflation and signaling that the central bank may not have as much power as it thought to slow growth. price.

“If inflation stays higher, the Fed will face the difficult choice of pushing the economy into recession, abandoning the soft landing scenario or enduring inflation higher than 2%,” Sanders said. “For us, accepting higher inflation is the wiser choice.”

Inflation expectations are also rising, with close monitoring University of Michigan consumer sentiment survey showed one- and five-year inflation expectations at 3.2% and 3% annualized, respectively, the highest since November 2023.

No less a source than JPMorgan Chase CEO Jamie Dimon this week vacillated from calling the U.S. economic boom “unbelievable” on Wednesday to a letter the day saying told the Wall Street Journal that he worries that all the government spending is creating inflation that is more difficult to control than what already exists. is now highly appreciated.

“That's driving a lot of this growth, and that's going to have other consequences that may come later called inflation, which may not go away as people expect,” Dimon said. “So I look at a range of possible outcomes. You could have that soft landing. I'm a little bit more worried that it might not be so soft and inflation might not take off.” as one would expect.”

Dimon estimates that the market is pricing in a 70% chance of a soft landing.

“I think it's half of it,” he said.