Gasoline prices are displayed at a gas station on March 12, 2024 in Chicago, Illinois.
Scott Olson | Getty Images
A closely watched report from the Labor Department, due Wednesday, is not expected to show much progress in the fight against inflation.
If so, that would be bad news for consumers, market participants and Federal Reserve officials, who hope that price increases will be slow enough that they can begin phasing out interest rates later This year.
The consumer price index, which measures the costs of a broad basket of goods and services across the $27.4 trillion U.S. economy, is expected to record increases of 0.3% at both for all elements and for the basic indicator which excludes volatile food products. and energy.
On a 12-month basis, this would put inflation rates at 3.4% and 3.7% respectively, an increase of 0.2 percentage points in the headline rate from February, a decrease of just 0. 1 percentage point of the key rate, and these two rates are still far from being reached. the central bank’s 2% target.
“We didn’t get there fast enough or convincingly enough and I think that’s what this report is going to show,” said Dan North, senior economist at Allianz Trade North America.
The report will be released at 8:30 a.m. ET.
Progress, but not enough
North said he expects Fed officials to view the report much the same way, confirming comments they have been making for weeks that they need more evidence than the inflation is convincingly on its way back to 2% before we can cut rates.
“Moving convincingly toward 2 percent doesn’t just mean hitting 2 percent for one month. It means hitting 2 percent or less for months and months in a row,” North said. “We’re a long way from that, and that’s probably what’s going to show up tomorrow as well.”
To be sure, inflation has declined significantly since peaking above 9% in June 2022. The Fed enacted 11 interest rate hikes between March 2022 and July 2023, totaling 5.25 percentage points for its borrowing rate overnight benchmark, known as the federal funds rate.
But progress has been slow in recent months. In fact, the headline CPI has barely moved since the Fed stopped raising rates, even though the core index, which the Fed considers a better barometer of long-term trends, has fallen by about a quarter. percentage point.
While the Fed monitors the CPI and other indicators, it focuses primarily on the Commerce Department’s personal consumption expenditures index, sometimes called the PCE deflator. This shows that headline inflation stood at 2.5% and the policy rate at 2.8% in February.
For their part, markets have become nervous about the state of inflation and its impact on Fed policy. After posting big gains early in the year, stocks pulled back over the past week, leading to wild swings in the markets as investors tried to overcome mixed signals.
Earlier this year, traders in the federal funds futures market were pricing in the likelihood that the central bank would begin cutting rates in March and continue through up to seven cuts before the end of 2024. Latest assessments indicate that the cuts will not occur. start through at least June and total no more than three, assuming increases of a quarter of a percentage point, according to CME Group’s FedWatch calculations.
“I don’t see much here that can magically make things happen the way they want,” North said.
What to watch
There will be a few key areas to watch in Wednesday’s report.
Beyond the big numbers, trends in areas such as housing, airfares and vehicle prices will be important. These areas have been bellwethers during the current economic cycle, and developments in either direction could suggest longer-term trends.
Economists at Goldman Sachs expect net declines in airline-related items as well as auto sticker prices, and see smaller increases in housing costs, which account for about a third of the CPI weighting . A New York Fed survey released Monday, however, shows a sharp rise in rental cost expectations over the next year, bad news for policymakers who have frequently cited decelerating housing costs as the cornerstone of their thesis on easing inflation.
Similarly, the March survey from the National Federation of Independent Business, released Tuesday, shows small business confidence is at its lowest level in more than 11 years, with owners citing inflation as their biggest concern.
“Inflation is cumulative, and that’s why prices always seem high,” North said. “People still can’t believe how high the prices are.”
Gas prices could also play an important role in the CPI release after increasing 3.8% in February. Although the gasoline index is relatively unchanged over the past two years, it is still up more than 70% from April 2020, when the brief Covid-induced recession ended. Food increased by approximately 23% during the same period.
cnbc
