The price of goods and services remains elevated around the U.S., as evidenced by four recent reports by the U.S. government. They all showed that inflation remains well above the Fed's target of 2%, making it harder for the nation's central bank to transition from monetary tightening to monetary easing.
A Federal Reserve Bank of New York report released on Feb. 12 showed that consumer expectations for inflation for the year ahead remained steady at 3%.
Another report published by the Bureau of U.S. Labor Statistics (BLS) on Feb. 13 showed that the Consumer Price Index (CPI), a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, rose at an annual rate of 3.1% in January 2024 -- down from up from 3.4% in December, but ahead of market expectations of 2.9%. In addition, core CPI, which excludes food and energy from the consumer basket, came at 3.9%. It is unchanged from the previous month, but it, too, exceeded market forecasts.
A third report released by BLS a couple of days later showed that the Producer Price Index (PPI), which measures the average change over time in the selling prices received by producers, rose at a monthly rate of 0.30% in January, the most significant increase in five months, and ahead of market expectations of 0.10% rise.
A fourth report released on Feb. 29 by the Bureau of Economic Analysis showed that the PCE inflation rate in the U.S. rose at an annual rate of 2.4% in January 2024, in line with market forecasts.
PCE is the Fed's favored inflation gauge. It includes a wide range of goods and services purchased by households, considering changes in consumer behavior, and buying patterns over time. In addition, PCE incorporates expenditures not covered by CPI, like health care services paid for by third parties—a big chunk of consumer spending.
Elevated inflation is usually a headwind for Wall Street as it keeps long-term interest rates higher, preventing the Federal Reserve from short-term interest rates.
Still, Sonu Varghese, Global Macro Strategist at Carson Group, believes the elevated inflation numbers are due to seasonal factors. "PCE inflation, which is the Fed's preferred metric, came in along with expectations but was the hottest in several months," he told International Business Times. "The jump in inflation is mostly because of a 'January price effect' for several core services categories, and likely to pull back over the next few months."
Gus Faucher, Chief Economist at PNC Financial Services Group, agrees. "Inflation accelerated over the month, particularly core inflation; this was expected after similar results in the January CPI report," he told IBT. "Core inflation over the past six months is now above 2% annualized, after being slightly below it in December. But both overall and core PCE inflation slowed on a year-over-year basis. And the acceleration in monthly inflation is likely a one-off, with smaller price increases in the months ahead."
Arnim Holzer, Global Macro Strategist at Easterly EAB Risk Solutions, believes that the Fed's recent inflation numbers validate the Fed's waiting and watching strategy.
"We believe that the Fed is beginning to come to a view that, if the economy can reach a stable state, with productivity at reasonable levels, employment at reasonable levels," he said. "And steady market transactions, that the need to lower rates to stimulate activity and ease financial transactions and overall economic behavior is not as great as it may have been before the pandemic."
But Sonu thinks the recent inflation numbers push out the timing of the first rate cut to at least May, at the earliest, if not June, while reducing the number of cuts over the full year 2024.
"Markets have also come to terms with this, with a sharp repricing in rate cut expectations to just about three cuts of 25 bps each in 2024, matching the official Fed projections," he added.
But Morgane Delledonne, Head of Investment Strategy, Europe for Global X, believes that recent inflation reports do not change the game for the Fed.
"Today's PCE inflation data for January aligned with expectations, leaving bets of three Fed funds rate cuts this year unchanged," she told IBT. "While the favorite gauge of inflation by the FOMC suggests inflation could be on track to its 2% target and economic activity remains strong, the Fed might soon increase focus on financial conditions and start discussing adjustments to its balance sheet reductions as financial institutions quickly abandon reverse repo."
