All data shows that inflation is not going away, which makes the situation difficult for the Fed

A customer shops food at a supermarket on March 12, 2024 in San Rafael, California.

Justin Sullivan | Getty Images News | Getty Images

The last batch of inflation news that Federal Reserve officials will see before their policy meeting next week has arrived, and none of it is very good.

Overall, the Commerce Department indexes that the Fed relies on for inflation signals showed prices continuing to rise at a pace still significantly above the central bank's annual target of 2%, separate data showed. reports this week.

Within that picture, several salient points emerged: An abundance of money still sloshing through the financial system gives consumers sustainable purchasing power. In fact, consumers are spending more than they take in, a situation that is neither sustainable nor disinflationary. Finally, consumers are dipping into savings to finance those purchases, creating a precarious scenario, if not now, then in the future.

All things considered, the bottom line is that the Fed is likely to be cautious and not in the mood to cut rates anytime soon.

“Just spending a lot of money creates demand, it creates incentives. With unemployment below 4%, it shouldn't be too surprising that prices aren't falling,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “Spending figures will not fall anytime soon. So there could be a sticky inflation scenario.”

Data indeed Bureau of Economic Analysis was released Friday indicated that spending exceeded income in March, as it did in three of the past four months, while the personal savings rate fell to 3.2%, the lowest level since October 2022.

At the same time, the personal consumption expenditure price index, the Fed's main measure in determining inflation pressures, rose to 2.7% in March when all products are included, and remained at 2.8% for the crucial core measure that captures more volatile excludes foodstuffs and food supplies. energy prices.

A day earlier, the ministry reported that annualized inflation in the first quarter totaled 3.7% in the first quarter, and on a headline inflation basis it was 3.4%. That was because real gross domestic product growth slowed to 1.6%, well below the consensus estimate.

Danger scenarios

Moreover, a still vibrant labor market, in which at one point the number of available jobs exceeded the available workers by a margin of 2 to 1 and still remains about 1.4 to 1, helped keep wage pressures high.

Even as demand shifts back from goods to services, inflation remains high, confounding the Fed's efforts to slow demand.

Weak growth and rising inflation are a bad combination for the Dow Jones, says Jim Cramer

Fed officials had thought inflation would ease this year as housing costs decline. While most economists still expect an influx of supply to drive down shelter prices, other areas have emerged as well.

For example, core PCE services inflation excluding housing — a relatively new wrinkle in the inflation equation nicknamed “supercore” — has been at 5.6% annualized over the past three months, according to Mike Sanders, head of fixed income at Madison Investments.

Demand, which should be suppressed by the Fed's rate hikes, has remained robust. This contributes to inflation and indicates that the central bank may not have as much power as it thinks to reduce the pace of price increases.

“If inflation remains higher, the Fed will be faced with the difficult choice of pushing the economy into recession, abandoning the soft landing scenario or tolerating inflation above 2%,” Sanders said. “For us, accepting higher inflation is the wisest option.”

Worries about a hard landing

So far, the economy has managed to avoid broader damage from the inflation problem, although there are some notable cracks.

Loan delinquencies have reached their highest level in a decade, and there is growing concern on Wall Street that more volatility is on the way.

Inflation expectations are also rising, with inflation being closely monitored University of Michigan Consumer Confidence Survey It shows that one- and five-year inflation expectations are at 3.2% and 3% annually respectively, the highest level since November 2023.

None other than a source than Jamie Dimon, CEO of JPMorgan Chase, hesitated this week to call the U.S. economic boom “incredible” on Wednesday, in a daily letter in which he told The Wall Street Journal that he worries that all government spending creating inflation that is more persistent than what is currently the case. currently rated.

“That's driving a lot of this growth, and that may also have other consequences, so-called inflation, which may not go away as people expect,” Dimon said. “So I look at the range of possible outcomes. You can get that soft landing. I'm a little more concerned that it might not be as soft and that inflation might not go quite the way people expect.”

Dimon estimated that markets put the chance of a soft landing at 70%.

“I think it's half,” he said.

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