People shop in the grocery department of a retail store in Rosemead, California, January 19, 2024.
Frederic J. Brown | AFP | Getty Images
Inflation trends may have become a little less bleak in April, although they are still likely to make the Federal Reserve uneasy enough to continue pausing interest rates.
The consumer price index, a broad measure of the cost of goods and services in the market, is expected to post another rise this month, although the annual inflation rate is expected to fall slightly, according to Dow Jones consensus forecasts.
Prices for all items are expected to rise 0.4% month-on-month, the same as in March, although the annual rate is expected to fall slightly to 3.4%, compared with 3.5% last month. For the key core metric, which excludes food and energy, the respective forecasts are at 0.3%, down from the 0.4% gain in March, and at 3.6%, down from 3.8%.
In remarks Tuesday in Amsterdam, Fed Chairman Jerome Powell expressed hope that inflation would slow over the course of the year, but acknowledged slow progress and offered further indications that interest rates are unlikely to move any time soon.
“I expect inflation on a monthly basis to fall back to levels more in line with the lower levels of last year,” he told participants at a banking conference. “I would say my confidence is not as high as it was before after seeing these numbers in the first three months of the year. So we just have to wait and see where the inflation data goes.”
Wholesale meter brings bad news
In line with better-than-expected readings in the first quarter, the producer price index rose 0.5% in April, almost twice as high as expected, meaning the second quarter would get off to a bad start. The index, an indicator of wholesale prices, rose 2.2% on an annual basis, the highest in a year.
This has also increased the significance of Wednesday’s CPI release. The Department of Labor’s Bureau of Labor Statistics will provide the data at 8:30 a.m. ET.
“This will be the most important reading of the month [excluding nonfarm payrolls] “As inflation continues to exceed expectations,” said Dan North, senior economist at Allianz Trade North America. Even if the report meets consensus expectations, it would be “insufficient progress for the Fed to consider a rate cut by September,” he added.
In fact, financial markets have given up hope of an accommodative Fed, reducing expectations of at least six rate cuts since the start of the year to two, with the first unlikely to come before the September meeting.
However, stocks have proven resilient in the face of tighter monetary policy from the Federal Reserve and the focus has instead been on solid corporate earnings and economic growth.
Focus on housing
Wall Street will comb through the CPI report looking for signs of how long elevated inflation will last. Sentiment surveys in recent days have shown consumer inflation expectations rising, which the Fed sees as crucial to containing price pressures.
A key focus on Wednesday will be housing, with housing costs accounting for about a third of the weight in the CPI. Fed officials had expected rental market pressures to ease, a sign that the sharp disinflation of 2023 would recur this year, but have so far thwarted that.
“The slower the decline, the longer the path to the Fed’s inflation target,” said Erica Groshen, a senior economist at the Cornell School of Industrial and Labor Relations and a former senior official at both the BLS and the New York Fed. “We don’t see any major changes in the property market that would lead me to believe it will behave differently now. Demographic development changes only slowly. Therefore, I see no real explanation for the real estate market reacting very differently than it has in the past.”
The main component of housing costs is the so-called owner equivalent rent, a hypothetical measure of what owners think they can get for renting their homes. It rose 5.9% annually in March, below the peak of over 8% in April 2023, but still well above a level equivalent to headline inflation of 2%.
While Fed officials have been willing to consider housing costs when considering policy, continued price rigidity could change that. Central bankers had even developed a separate measure called “Super Core” that looked at the cost of services excluding food, energy and housing services, but that may not be as relevant now.
“It’s very important that the Fed doesn’t lag behind here,” Groshen said. “So I think this will make the Fed more cautious about cutting rates. I don’t think this would be enough to raise interest rates, but it will probably encourage them to be cautious.”
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2024-05-14 20:29:26
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