Inflation continues to be higher than expected, and the road to U.S. interest rate cuts is more bumpy

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The latest data released by the United States on the 10th showed that inflation has been higher than market expectations for many consecutive months. This has triggered concerns in the industry about economic risks. It is believed that the path of the Federal Reserve’s interest rate cuts may be more bumpy, and there is even the possibility of not cutting interest rates during the year.

　　Inflation continues to be higher than expected

Data released by the U.S. Department of Labor on the 10th showed that the U.S. Consumer Price Index (CPI) rose by 3.5% year-on-year in March this year, an increase of 0.3 percentage points from February, exceeding market expectations.

Data show that the U.S. CPI increased by 0.4% month-on-month in March this year, the same increase as in February. After excluding volatile food and energy prices, core CPI rose 0.4% month-on-month and 3.8% year-on-year, both of which were the same as in February.

Specifically, energy prices increased by 1.1% month-on-month in March after a sharp increase in February, of which gasoline prices increased by 1.7% month-on-month. Housing costs, which account for about one-third of the CPI, rose 0.4% month-on-month, the same increase as February and 5.7% higher than the same period last year. Food prices increased by 0.1% month-on-month.

It is worth noting that in core CPI, the cost of goods continues to decline year-on-year, but prices in the service industry are accelerating again. The core CPI service index increased by 0.7% month-on-month and 5.0% year-on-year, which is the highest level since April 2023.

Regarding the latest data, US President Biden said that US inflation has dropped by more than 60% from its peak, but more efforts are still needed, calling on companies to use record profits to lower prices.

Paulik, senior portfolio manager at Dakota Wealth, said the inflation data was “hotter” than expected, and both headline and core data showed that inflation is sticky.

A survey of consumer expectations released this week by the Federal Reserve Bank of New York showed that Americans are preparing for high inflation in the coming years, with the public’s consensus median expectation that inflation will rise by 3% a year from now, which is consistent with previous forecasts. It was flat last month and expects inflation to remain high in the coming years, suggesting they believe sticky inflation is likely to persist.

　　Economic downturn risks may increase

Despite improvements in employment and manufacturing data, continued high inflation has raised concerns about downside risks to the economy.

Jamie Dimon, CEO of JPMorgan Chase, warned on the 8th that excessive spending by the U.S. government may continue to push up inflation and interest rates. In his annual letter to shareholders, Dimon assessed the state of the U.S. economy, the possibility of a “soft landing” and other issues. He wrote: “The U.S. economy is being ‘driven’ by massive government spending and stimulus measures. However, as the need to reorganize global supply chains, increase military spending, etc. continues to grow, it may lead to more severe inflation and higher prices than the market expects.” interest rate.”

George Lagarias, chief economist at Mazars Accounting Firm, said recently: “The ‘strong economy’ in the United States is undoubtedly supported by debt and, to some extent, by overwhelmed credit cards.”

Market participants believe that even if the inflation rate is far away from the peak created in mid-2022, the Federal Reserve’s 11 interest rate hikes totaling 525 basis points and the reduction of nearly 1.4 trillion US dollars in bond holdings have not completely eradicated the stubborn inflation problem. .

From a micro perspective, companies are also concerned about the impact of high inflation on their performance prospects. El-Erian, chief economic advisor of Allianz Group, recently stated that the economic community mistakenly believed that inflation was temporary in 2021 and did not listen to the opinions of entrepreneurs at that time. These companies clearly stated that there was inflationary pressure at the time, and pricing power concealed the severity of the problem. . El-Erian said businesses are worried about the outlook for the rest of the year and that macroeconomic data often doesn’t reflect how businesses are really feeling.

As far as ordinary people are concerned, high inflation also erases the perception of growth in macroeconomic data. A recent research report written by Harvard economist Stancheva and published by the Brookings Institution shows that most respondents believe that over the past two years, economic conditions have not gotten better, but have gotten worse. Inflation can evoke broader feelings of unfairness.

　　The road to interest rate cuts is more bumpy

The latest inflation data report is further evidence that although the Federal Reserve has kept interest rates at 20-year highs, progress in curbing inflation may be stalling, and the road to interest rate cuts expected by the market during the year will be more bumpy.

Fed officials have insisted they want to see more evidence that price pressures are continuing to cool before lowering borrowing costs amid a strong labor market boosting household demand.

After the latest data was released, the Chicago Mercantile Exchange’s Fed Interest Rate Watch Tool showed that the probability of the Fed cutting interest rates at the June meeting was less than 20%, far lower than the 56% expected before the release of inflation data. This means that market expectations for a rate cut by the Federal Reserve in June have almost disappeared, and even the prospect of a rate cut in July looks more unstable.

After the Federal Reserve concluded its March monetary policy meeting, it kept the federal funds rate target range unchanged at 5.25% to 5.5%. Federal Reserve Chairman Jerome Powell emphasized that the Fed will maintain a patient and cautious attitude towards interest rate cuts, which is consistent with recent statements by other senior Fed officials. These remarks also cooled market expectations that the Federal Reserve will implement interest rate cuts in the short term.

Goldman Sachs analyst Lindsay Rosner said the interest rate market needs to seriously consider the possibility that interest rates will remain high for a longer period of time, with high interest rates continuing at least until this summer and possibly even until the end of this year.

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