CPI Shows Persistent Inflation
Last week the Consumer Price Index (CPI) was the biggest economic release.
CPI headline inflation increased for the month and also increased for the year, reversing the declining trend that began in October 2023. Core CPI, which excludes volatile food and energy prices, also accelerated monthly but the year-over-year rate declined slightly to 3.93%. Both headline and core CPI remain near 4%, well above the Federal Reserve’s 2% target.
Housing Driving Inflation
Looking at CPI components, services and housing (a major part of services) continue running well above the Fed’s goal.
In fact, CPI minus food, energy, and shelter is near the target.
Housing accounts for about 1/3 of CPI and its 4.7% annual inflation rate has remained fairly steady. This explains the Fed’s caution about declaring victory over inflation.
Balancing Inflation and Growth
Many expect the Fed to start cutting rates in March without a recession, but that seems unlikely. The Fed must balance keeping rates high enough to reduce shelter inflation, without pushing other sectors into recession. Manufacturing has contracted over a year already. The Fed faces a delicate balance.
Real Earnings Remaining Positive
One positive note was that real (inflation-adjusted) earnings remained positive annually, although both measures declined slightly.
With households’ pandemic savings dwindling, watching real earnings will show US household strength.
Encouraging PPI Data
The Producer Price Index (PPI) was also encouraging.
Both headline and core PPI were below 2%, again emphasizing housing’s importance for future inflation.
International Trade Slowing
Finally, lower imports and exports indicate some overseas economic weakness. Declining trade helps limit inflation currently but signals slowing global growth.
While a soft landing can’t be ruled out, persistent inflation amidst signs of weakness make the Fed’s path forward challenging.
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