US Inflation Inches Up, Delaying Prospects of Fed Rate Cuts

US Inflation Inches Up, Delaying Prospects of Fed Rate Cuts

US Inflation Inches Up, Delaying Prospects of Fed Rate Cuts

The latest inflation report in the United States reveals a persistent burden on American consumers as prices continue their upward trend.

The Federal Reserve closely monitors these developments, particularly its preferred measure, the Personal Consumption Expenditures (PCE) price index, which indicated a 2.5% rise for the 12 months ending in February. This uptick marks a slight acceleration compared to January's 2.4% increase but aligns with FactSet consensus estimates. The driving force behind this rise was a notable 2.3% surge in energy prices last month, as reported by the Commerce Department.

Despite the deviation from the Fed's 2% inflation target, Federal Reserve Chair Jerome Powell remains relatively unperturbed. Speaking at an event hosted by the San Francisco Fed, Powell characterized the data as "pretty much in line with our expectations." He emphasized the positive aspect of data aligning with the central bank's projections.

However, within the report lies some encouraging signs. The core PCE index, which excludes volatile food and energy prices, demonstrated a slight deceleration to 2.8% from January's 2.9% annual rate. On a monthly basis, it moderated to 0.3% from January's 0.5%, meeting expectations. Additionally, the overall monthly pace of price increases slowed marginally to 0.3% from January's 0.4%, falling below economists' forecasts.

A notable observation is the disparity between the price increases of goods and services. While goods saw a monthly rise of 0.5%, outpacing services' 0.3% increase, the latter has been a primary driver of overall inflation in recent years. The Federal Reserve's significant rate hikes, bringing interest rates to a 23-year high, have had limited success in curbing service-side inflation. Labor shortages have been the primary catalyst for these price hikes, prompting employers to raise wages and subsequently increase prices.

In contrast to recent economic data suggesting a slowdown in consumer spending, the PCE data revealed an opposite trend. Consumer spending surged by 0.8% last month, marking the most substantial monthly rise in over a year compared to January's 0.2%. However, this surge may not be grounds for celebration. Chief economist Kathy Bostjancic of Nationwide noted that it underscores consumers' depletion of pandemic-related savings, evident in record-high credit card debt. While robust employment growth can support solid spending, consumers are ill-prepared for a weakening labor market scenario.

The latest inflation data is unlikely to alter the Federal Reserve's plans for future interest rate cuts. Fed officials, including Chair Powell, have signaled that achieving 2% inflation will be a gradual process. Governor Christopher Waller reinforced this stance in a recent speech titled "There’s Still No Rush," indicating a prudent approach to maintaining the current rate stance to ensure sustainable inflation levels. Fed policymakers continue to project three rate cuts this year, with investors anticipating the first in June.

In summary, the latest inflation report presents a mixed picture. While inflation edged higher and consumer spending surged, concerns persist regarding the sustainability of these trends and their implications for monetary policy. The Federal Reserve remains cautious, prioritizing a balanced approach to inflation management while navigating the complexities of the current economic landscape.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

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