The early data for inflation in the first three months of 2024 is concerning, with prices at both the register and wholesale input costs remaining high. While inflation has decreased from the intense levels seen in 2022, it doesn’t seem to be decreasing any time soon. Future expectations for inflation have also been increasing. Investors, consumers, policymakers, and economists alike have been surprised by the persistence of price pressures in 2024. The stock market experienced a decline on Friday as the Dow Jones Industrial Average fell nearly 500 points, erasing most of the gains for the year.
Import prices have also played a role in the inflation narrative, with March seeing the largest increase for a three-month period in two years. This has created significant challenges for the markets, which experienced continuous selling throughout the week, culminating in a drastic decline on Friday. The situation was further complicated by reports of potential conflict between Iran and Israel, leading to geopolitical tensions that affected energy prices and contributed to inflation.
At the beginning of the year, markets anticipated a Fed that would cut interest rates frequently. However, as inflation data continued to be stubborn, investors have had to readjust their expectations, now predicting only two rate cuts. The economic news in the past week has been overwhelmingly negative, with various reports highlighting the rising inflation across different sectors. The University of Michigan’s consumer sentiment survey showed an increase in inflation expectations, adding to concerns.
While most Fed officials still expect rate cuts later in the year, they acknowledged the higher inflation readings and noted the need for further evidence that inflation is decreasing. The Fed typically follows the personal consumption expenditures price index to monitor inflation, which has not yet been released for March. The differences between the PCE and CPI indexes can impact the Fed’s decisions, with the PCE adjusting for changes in consumer behavior and placing less emphasis on housing costs.
Multiple economic indicators, such as the sticky price CPI, flexible CPI, and trimmed mean PCE, continue to show that the Fed has a long way to go in achieving its inflation target. While the economy has been resilient to high inflation so far, there are concerns about the impacts on employment and overall growth. Some economists have suggested rethinking the Fed’s commitment to a 2% inflation target, with proposals to aim for slightly higher inflation rates. The risk of inflation exceeding 3% remains a concern that could pose challenges for the Fed and the economy in the future.
