Awaiting a Sustainable Sign of Inflation Cooldown
As the Federal Reserve prepares to meet on March 20th, all eyes are on their economic projections and decision on interest rates. While the Fed seeks sustainable downward movement in inflation, they may either push out the date for expected cuts or reduce the number of expected cuts, even though many expect rates to remain steady.
Consumer Price Index (CPI) Trends
Despite the Fed’s hopes, recent economic releases do not support the thesis of sustainable downward movement in inflation. Headline CPI has seen ongoing acceleration in monthly readings and an increase in the year-over-year rate.
If the last three months of CPI are projected forward, the expected CPI would be 4%. As the chart indicates, we have had CPI increasing since November 2023.
Core CPI: A Closer Look
Removing the volatile food and energy components, core CPI shows a slight decline in the last month, translating to a lower year-over-year rate of 3.75%.
While this is encouraging, the recent upward trend in monthly readings demonstrates the stickiness of core inflation. Extrapolating the last three months yields an expected annualized rate of 4.2%, moving in the wrong direction.
Inflation Components Breakdown
Breaking down CPI into its components reveals that services remain the strongest part of inflation, with housing being the major contributor. However, we’ve also observed an uptick in nondurables and other services, such as car insurance.
Mixed News on Real Earnings
Real hourly earnings and real average weekly earnings remain positive, but weekly earnings have shown some near-term weakness. The last three months of US Real Average Weekly Earnings declined by 1.2% per year. This contradicts the soft-landing scenario that relies on persistent positive real earnings to grow household wealth.
Retail Sales Barely Positive
Retail sales improved from last month’s decline.
But, when adjusted for inflation, the numbers were barely positive for the month and negative for the year. Annualizing the last three months yields an annualized return of negative 5.3%, which is not in line with a soft-landing scenario.
Producer Price Index (PPI) Trends
The Producer Price Index (PPI) continues to show strength from recent months, even when we exclude food and energy sectors (core PPI).
Annualizing the last three months of core PPI results in a 3.0% rate, higher than the present annual rate of 2%.
Rates Likely to Remain Higher for Longer
Despite recent inflation numbers coming near consensus expectations, the upward trends are not encouraging. Real earnings are getting weaker and real retail sales are negative. So, the Federal Reserve will likely need to keep rates steady. They will also need to keep seeking confirmation of sustainable inflation declines before cutting rates. The odds of recession versus soft landing remain about the same.
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