An advertising units for rent sign is displayed outside a Manhattan building on April 11, 2024 in New York City.
Spencer Platt | Getty Images
The first figures are in on the path of inflation in the first three months of 2024 and the news so far is not good.
Pick your poison. Whether it is prices at the register or wholesale input costs, while inflation is lower than the explosive rate of 2022, it does not appear to be abating anytime soon. Future expectations have also increased.
Investors, consumers and policymakers — even economists — have been caught off guard by how persistent price pressures have been to start 2024. Stocks tumbled on Friday as the Dow Jones industrial average climbed nearly 500 points, fell 2.4% on the week and gave up almost all of its gains for the year.
“Fool me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “We’re now three months into the print run coming in above what everyone expected. It’s time to change the way we think about things going forward.”
Without a doubt, the market was forced to change its thinking dramatically.
Even import prices, an otherwise minor data point, contributed to the narrative. In March, it posted its biggest one-quarter gain in about two years. All of this has been a major headache for the markets, which sold off most of the week before actually reaching Friday.
As if all the bad news about inflation wasn’t enough, a Wall Street Journal report Friday indicated that Iran plans to attack Israel in the next two days, adding to the cacophony. Energy prices, which have been a major factor in inflation readings over the past two months, pushed higher on signs of further geopolitical turmoil.
“You can choose. There are a lot of catalysts” for Friday’s sell-off, said market veteran Jim Paulsen, a former strategist and economist at Wells Fargo and other companies who now writes a blog for Substack called Paulsen Perspectives. “More than anything else, it’s really down to one thing now, and that’s the Israel-Iran war if it’s going to happen … It just gives you a great sense of instability.”
High hopes were dashed
Instead, heading into the year markets saw an accommodative Fed poised to cut rates early and often — six or seven times, with the start taking place in March. But with stubborn data every month, investors had to recalibrate, now expecting only two cuts, according to futures market prices, which have a non-zero chance (about 9%) of no cuts this year.
“I would like the Fed to be able to cut interest rates later this year,” said Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “But the data just isn’t close to being there, at least not yet.”
This week has been full of bad economic news, with each day literally bringing another dose of inflation reality.
It began Monday with a New York Fed survey of consumers showing expectations for rent increases next year rose sharply to 8.7 percent, or 2.6 percentage points higher than the February survey. The outlook for food, gas, medical care and education costs also rose.
On Tuesday, the National Federation of Independent Business showed that optimism among its members hit an 11-year low, with members citing inflation as their top concern.
Wednesday brought a higher-than-expected measure of consumer prices that showed 12-month inflation at 3.5 percent, while the Labor Department said Thursday that wholesale prices posted their biggest one-year rise since April 2023.
Finally, a report on Friday said import prices rose more than expected in March and posted the biggest quarterly gain since May 2022. Additionally, JPMorgan Chase CEO Jamie Dimon warned that “persistent inflationary pressures” are threat to the economy and business. And the closely watched University of Michigan survey of consumer sentiment came in lower than expected, with respondents also raising their outlook for inflation.
Still ready to be cut, at some point
Fed officials noted the higher readings but did not sound a panic alarm, as most said they still expected to cut later this year.
“The economy has come a long way toward achieving better balance and achieving our goal of 2 percent inflation,” New York Fed President John Williams said. “But we haven’t seen the full alignment of our dual mandate yet.”
Boston Fed President Susan Collins said she sees inflation “steadily, albeit unevenly” returning to 2%, but noted that “it may take longer than I previously thought” for that to happen. The minutes were published on Wednesday from the Fed’s March meeting showed that officials were concerned about higher inflation and were looking for more convincing evidence that it is on a steady course lower.
While the consumer and producer price indices grabbed the market’s attention this week, it’s worth remembering that the Fed’s attention is elsewhere when it comes to inflation. Instead, policymakers follow the yet-to-be-released personal consumption expenditure price index for March.
There are two main differences between the CPI and the PCE indicators. Primarily, the Commerce Department’s PCE adjusts for changes in consumer behavior, so if people are substituting, say, chicken for beef due to price changes, that will be more reflected in the PCE than the CPI. Also, the PCE gives less weight to housing costs, an important factor with rental and other shelter prices kept higher.
In February, PCE readings were 2.5% for all items and 2.8% excluding food and energy, or the “core” gauge that Fed officials watch most closely. The next release won’t come until April 26th. Citigroup economists said current monitoring data indicated the core was lower at 2.7%, better but still short of the Fed’s target.
Adding the signals
Moreover, there are many other signs that the Fed has a long way to go.
The so-called sticky CPI price, as calculated by the Atlanta Fed, rose as much as 4.5% on a 12-month basis in March, while the flexible CPI rose a full percentage point, albeit to just 0.8%. The fixed-price CPI includes items such as housing, car insurance and medical services, while the flexible price is concentrated in food, energy and vehicle prices.
Finally, the The Dallas Fed cut average PCEthat pushes the extreme readings on either side to 3.1% in February – again well short of the central bank’s target.
One bright spot for the Fed is that the economy has been able to tolerate high interest rates, with little impact on the employment picture or growth at the macro level. However, there is concern that such conditions will not last forever, and there have been signs of cracks in the labor market.
“I have long been concerned that the last mile of inflation would be the most difficult. There is a lot of evidence of a nonlinearity in the deflation process,” said Furman, the Harvard economist. “If that’s the case, you’d need a decent amount of unemployment to get inflation to 2.0%.
That’s why Furman and others pushed for the Fed to reconsider its firm commitment to 2 percent inflation. BlackRock CEO Larry Fink, for example, told CNBC on Friday that if the Fed could get inflation to around 2.8%-3%, it should “call it a day and win.”
“At the very least, I think getting to something that rounds inflation to 2 percent would be fine — 2.49 rounds to two. If it stabilizes there, I don’t think anyone would notice,” Furman said. “I don’t think they can tolerate a risk of inflation above 3, and that’s the risk we’re facing right now.”