Federal Reserve policymakers will be watching a new inflation report on Wednesday for evidence that larger-than-expected price increases earlier this year were an outlier and not a sign that progress in fighting inflation is back under control devices.
This makes the release hugely important as central bankers consider when and how much to cut interest rates.
Economists say the consumer price index most likely rose 3.4 percent in March compared to a year ago, up slightly from 3.2 percent in February. However, this increase would include an increase in gas prices.
Analysts tend to focus on a measure of inflation that ignores volatile fuel and food prices to better assess the underlying trend. This “core” metric is expected to have risen 3.7 percent year-on-year, down slightly from 3.8 percent in February. That would be the coolest annual reading since the beginning of 2021 and most likely a positive sign for central bankers.
This week’s inflation numbers come at a critical time for the Fed. Central bankers are hoping to confirm that higher-than-expected inflation numbers earlier in the year were just a seasonal quirk – not evidence that inflation is stuck well above the 2 percent inflation target.
While the Fed officially targets inflation in personal consumption expenditures, a separate measure, the consumer price index comes out earlier and includes data that feeds into the other measure. That makes it a closely watched signal of how price pressure is developing.
Policymakers have made it clear they want to see more evidence of cooling inflation before cutting interest rates. Fed officials raised borrowing costs to 5.3 percent in 2022 and early 2023, which they say is high enough to significantly weigh on the economy. Central bankers predicted in March that they would cut interest rates three times this year.
But Fed officials don’t want to cut interest rates until they’re sure inflation is on the path to normality. Reducing credit costs too early or too much carries the risk that price increases will pick up again. And if households and businesses expect inflation to remain slightly higher, officials fear it could become even more difficult to contain inflation in the future.
The threat of persistent inflation has become a more serious concern for policymakers since the start of the year. After months of steady declines, inflation has leveled off in recent months, raising concerns among the Fed and forecasters. At the start of the year, investors expected the Fed to cut interest rates sharply in 2024 – to around 4 percent – but have scaled back those expectations. Investors now only expect two or three rate cuts.
Many economists assume that the strong inflation values in January and February could be a coincidence: Among other things, companies could have waited until the beginning of the year to pass on the price increases. And analysts see several fundamental reasons that inflation could cool over the course of 2024.
Economists at Goldman Sachs wrote this week that they see “disinflation in the pipeline” this year, in part because they expect car prices to cool and key rental housing prices to fall, even as a rise in health care inflation partially offsets this.
Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, said she believes inflation could fall even faster than the Fed expects, allowing officials to begin cutting interest rates this summer to avoid hurting the economy too much Pressure would be put on and a recession would be risked.
“I don’t think you wait too long because then it’s too late and the soft landing is at risk,” she said.
However, other economists are more cautious.
Analysts at Deutsche Bank called this week’s inflation data “a crucial factor in the timing and magnitude” of rate cuts, saying a combination of stronger-than-expected inflation and still-solid economic growth and hiring suggests the bar for rate cuts will be higher should be higher.
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2024-04-10 10:30:02
www.nytimes.com
