Sorry guys, but inflation isn’t going anywhere.
Inflation has long since overstayed its welcome, but on Tuesday it announced it was just starting to subside.
Over the past few months, Wall Street has largely ignored signals that inflation is worsening. No longer on the path to moderation. After declining from the strong days of 2022, inflation was on a downward trend in the first half of 2023. But sometime last summer, around the time the Fed stopped raising rates, not coincidentally, it regained control over the economy.
January statistics released on Tuesday: Consumer Price Index (CPI) It rose 0.3% from the previous month, accelerating from 0.2% the previous month.this is 3rd consecutive year of acceleration Compared to the previous month, it was the highest level since September.
The 12-month inflation rate fell to 3.1% from 3.4%, mainly because last January’s very high 0.5% rise was removed from the back end of the calculation. When January’s numbers are annualized, Headline inflation remained at a pace of 3.7%.
Core inflation, which excludes volatile food and energy prices, rose 0.4%. This went on for two months. Core CPI It stalled at 0.3%. To understand how big a 0.4% monthly increase is, just annualize it. If inflation lasted this long for 12 months, the inflation rate would be 4.8 percent.this is Worst monthly numbers since April last year.
At the end of last year, when it appeared that the decline in inflation had stopped, those who claimed that inflation had been decisively defeated frequently made the following points: 3 month and 6 month annual percentage rate As evidence that recent numbers can be more or less ignored in favor of the trend. That doesn’t help much with pigeon cases now.
The three-month annualized core inflation rate rose to 4% from 3.3% in January. The six-month annualized core interest rate rose from 3.2% to 3.6%. The three-month annualized headline inflation rate was 2.8%, up from 1.9% in the previous month. The six-month annualized rate rose from 3.1% to 3.3%.
like harvard university Jason Furman The best way to describe this inflation report is that inflation is rising, even though the 12-month figure is slightly lower.
Moreover, overall inflation is not a good way to determine trends. You should look at the core.
January data may be noise. But the best way to describe them is as an increase in inflation (on a monthly or tri-monthly basis). Inflation did not fall (this is true on a 12-month basis). pic.twitter.com/eAfAuXkP68
— Jason Furman (@jasonfurman) February 13, 2024
Hopes for inflation collapse dashed
wall street is Hoping for a much calmer report. The consensus forecast for headline inflation was 0.2% for the month and 3% for the year, with many expecting the 12-month figure to be 2.9%, symbolically below 3%. Core inflation was expected to be 0.3% monthly and 3.7% annually.
The incorrect prediction was revealed to be A sharp decline in the price of stocks and bonds That became clear on Tuesday, as investors realized that soaring inflation had put a damper on their hopes for a May interest rate cut.of Probability of interest rate cut in MayOnce a virtual certainty in the eyes of the federal funds market, and as of yesterday still a more likely bet, it had fallen to about 35% on Tuesday. The probability that the Fed will cut interest rates by June has fallen by three-quarters.
A month ago, we noted that the December inflation report showed that inflation was unlikely to continue declining. “Inflation data suggests we are. Instead of a soft landing, I headed for a “hard landing”. “Inflation appears to be stuck at levels well above the Fed’s target,” we wrote.
Our view a few days later after the Producer Price Index report was even more direct.
“Disinflation is over. At best, inflation remains high and stagnant, and there are signs that inflation could flare up again,” we wrote.
boat against the current
As always, we focus on the Cleveland Fed median and trimmed average as leading indicators of inflation. The news here is pretty dire. Median CPI The rate rose to 0.5% in January from 0.3% in December. This translates into an annualized rate of 6.5%, the highest in the past 11 months. The trimmed average also rose from 0.3% to 0.5%, also the highest level since February.
Last year’s decline convinced many investors that disinflation was here to stay and that it was clear that interest rates would be cut this year.of The wind is blowing in the wrong direction nowAnd the confidence placed in the disinflation narrative has made the problem even worse.
We are in the following position. Nick Carraway reflects on the tragedy of ‘The Great Gatsby’. “He had come a long way to reach this green grass, but his dream must have seemed so near that he could hardly grasp it. He knew it was already behind him. He didn’t know,” Carraway thinks as he sits on the beach in East Egg one last time.
The disinflationary episode that markets had expected is now a thing of the past.
