Inflation is back from the dead
There is a ghost that haunts Wall Street.ghost of resurgence of inflation.
Key inflation indicators are rising, indicating whether this is a bumpy road back to the Fed’s 2% target or evidence of a resurgence of inflationary pressures despite the Fed’s insistence on restrictive monetary policy. This is causing a debate as to whether this is the case.
The rise in the consumer price index (CPI) has accelerated every month since November, reaching an annualized rate of 5.4% in February’s figures.That is Highest level since August last year. The three-month average annual rate was 4.0%, higher than the six-month average of 3.2%, indicating a trend toward higher inflation.
The personal consumption expenditures (PCE) price index, which the Fed uses as the basis for its inflation targeting and forecasts, is Very high annual interest rate of 4.6% It was 4.1% in January and 4.1% in February. This means that at the beginning of the year, inflation was running at more than twice the Fed’s 2% target.
The final demand producer price index rose 0.6% in February, up sharply from a 0.3% rise in January and a modest decline in December. The annualized rate is 6.9%. This is mainly due to a significant increase in energy prices. The important thing is that Core processed products for intermediate demand It rose 0.5% for the month and 6.3% for the year. This speaks to a number of underlying inflationary pressures.
Will inflation stay in March?
When the government releases the consumer price index for March on Wednesday, all eyes will be on whether the trend of rising inflation will continue. Wall Street is expecting some cooling from February’s numbers. The consensus forecast is for both core CPI and composite CPI to decline by 0.4% to 0.3% month-on-month.Cleveland Fed’s Inflation Nowcast agrees, headline: Forecast is up 0.34%, core is up 0.31%.
One reason Wall Street expects CPI to moderate is because Falling prices of core goods. Wholesale prices for used cars are showing a decline in the used car CPI index, and new car prices appear to be falling as dealers increase inventory. However, the spike in inflation in the PPI’s index of processed goods to intermediate demand points in the opposite direction. This creates the potential for surprises in the financial side of CPI reporting, although the timing of spillovers from intermediate goods to consumer goods is highly unpredictable.
S&P Global’s March Purchasing Manager Survey found that the average selling price charged by commodity producers rose at the fastest pace in 11 months. S&P economist Chris Williamson said: Rising prices, especially of consumer goodsResearch shows it’s rising at a pace not seen in the past 16 months.
Core services are also seen to be cooling down. It rose by 0.46% in February, but has been rounded to 0.5%. The pace of increase in airfares is expected to slow significantly or even fall. Auto insurance inflation has continued at a ferocious rate, but it may slow down someday. Inflation in education and communication services is expected to subside.But these can be more than that Health insurance and medical care inflation offset by stubborn shelter inflation.
Even if inflation declines month-on-month, the year-on-year headline inflation rate is likely to be even higher because the low inflation rate from a year ago is subtracted from the 12-month calculation. Wall Street expects the 12-month headline CPI to rise 3.5% from 3.2% last month. Cleveland Fed Nowcast: The headline inflation rate rose to 3.41%.
Hot reports could surprise the Fed
So what does this mean for the Fed? The federal funds futures market is currently There is a 57% chance that it will be reduced by a quarter point in June.. In particular, if the Fed’s core services other than evacuation measures, which Fed officials have been focusing on, are affected, there is a strong possibility that confidence in the June rate cut will increase if the report is released in line with expectations.
If inflation cools more than expected, the probability of a rate cut could rise sharply. The Fed has made it clear that it wants to cut interest rates.That’s why there is Asymmetry in analysis. It is observed that one month of good inflation data easily outweighs two to three months of bad inflation data.
(Spencer Pratt, Drew Angerer/Getty Images; BNN)
As indicated above, our view is that Significant risk that inflation will be higher than expected. If this happens, hopes for a June interest rate cut are likely to collapse. The probability of an interest rate cut in July (currently about 75%) is also likely to decrease. The year-end interest rate forecast is likely to be raised to 5% from the current forecast of about 4.75%.
Why is inflation rising despite the Fed’s restrained monetary policy? One explanation is The Fed may simply be wrong about its monetary policy stance. Raising interest rates is likely to tighten policy and put short-term disinflationary pressure on the economy, but leaving interest rates unchanged is less effective as the economy is more flexible in adapting to new interest rate levels.
In other words, the Fed stopped raising interest rates last July, so current interest rates are no longer eliminates inflation.
