U.S. Federal Reserve Chairman Jerome Powell attends the “Fed Listens” event in Washington, DC, on October 4, 2019.
Eric Baradat | AFP | beautiful images
A higher-than-expected consumer price index rocked markets on Wednesday, but markets are buzzing about an even more specific price measure included in the data – the so-called inflation index. super core.
Along with the overall inflation measure, economists also look at the core CPI, which excludes fluctuating food and energy prices, to find real trends. The super core meter, which also excludes accommodation and rent costs from its service reading, even goes a step further. Fed officials said it is useful in the current climate because they view rising housing inflation as a temporary problem and not a good measure of underlying prices.
Supercore accelerated to a 4.8% year-on-year gain in March, the highest in 11 months.
Tom Fitzpatrick, managing director of global market insights at RJ O'Brien & Associates, said if you take the last three months' figures and annualize them, you'll see a super core inflation rate. more than 8%, far from the current inflation rate. Federal Reserve's 2% target.
“As we sit here today, I think they're probably pulling their hair out,” said Fitzpatrick.
An ongoing problem
CPI last month increased 3.5% over the same period last year, higher than Dow Jones' estimate of 3.4%. Data Stocks are under pressure and sent Treasury yields higher on Wednesday, while prompting futures market traders to extend expectations for the central bank's first rate cut to September since June, according to CME Group FedWatch Tools.
“At the end of the day, they don't really care as long as they get to 2%, but the reality is you're not going to get to a sustainable 2% if you don't get critical cooling in services. price, [and] At this point we don't see that,” said Stephen Stanley, chief economist at Santander US.
Wall Street has been acutely aware of the super-core inflation trend since the beginning of the year. The CPI index rose higher than the January CPI index enough to hinder “the market perception that the Fed is winning the war against inflation”. [and] This will remain an open question for many months to come,” said Ian Lyngen, head of US interest rates strategy at BMO Capital Markets.
Another problem for the Fed, Fitzpatrick said, lies in the different macroeconomic backdrop of demand-driven inflation and strong stimulus payments that have equipped consumers to ramp up discretionary spending on 2021 and 2022, while causing record inflation.
Today, he added, the picture is more complicated because some of the most stubborn components of services inflation are household necessities like auto and home insurance as well as property taxes. .
“They're so scared by what happened in 2021 and 2022 that we're not going to start from the same place as the other times,” Fitzpatrick added. “The problem is, if you look at all of this [together] These are not discretionary expenses, [and] It puts them between a rock and a hard place.”
The problem of sticky inflation
Complicating the picture further is that falling consumer savings rates and higher borrowing costs make central banks more likely to maintain restrictive monetary policy “until something happens.” out,” said Fitzpatrick.
He warned that the Fed will have difficulty reducing inflation by raising interest rates more because current dynamics are more difficult and insensitive to tighter monetary policy. Fitzpatrick said recent moves to increase inflation are more akin to tax increases.
Although Stanley believes the Fed is still a long way from raising interest rates, the possibility of doing so remains possible as long as inflation remains well above its 2% target.
“I think inflation will generally come down and they will cut interest rates later than we think,” Stanley said. “The question is, are we looking at something that is entrenched here? At some point, I imagine the possibility of rate hikes will return to prominence.”
