The US CPI is on track to be between 4% and 5% for the November elections

Inflation is once again leaving negative headlines in the US, with data that gives rise to some downright terrifying projections. The disinflation path was practically flawless in 2023: the consumer price index (CPI) fell from the peak of 8.9% year-on-year in June 2022 to around 3% and without damage to the economy despite the aggressive increases in inflation. Federal Reserve interest rates. But at the beginning of 2023 something has ‘broken’. The CPI not only remains stuck at that 3%, but In March it rose to 3.5%, moving even further away from the 2% target. The 0.4% month-on-month readings recorded lately are beginning to cause concern and the latest blow has come with a forecast in the form of a graph.

Aware that an image (or a graph) sometimes says more than a thousand words, the investment strategy analysts at Bank of America (BofA) outlined in their latest weekly newsletter, published at the end of last year, the same released the CPI for March, one in which you can see the trajectory that the CPI will follow in the coming months if the inter-monthly readings continue to be so high.

If the inter-monthly CPI readings continue at around 0.3% (the average of the last six months), the CPI would shoot up to 3.9% at the end of November, a key month when the presidential elections of USA on Tuesday the 5th. If these inter-monthly readings are at 0.4% (the average of the last three months), The CPI would reach November reflecting a catastrophic 4.8% year-on-year, approaching levels not seen since spring 2023.

Although these figures may seem crazy right now, they are not far from some warnings made by analysts last week after the CPI data. Edoardo Campanella, from UniCredit Research, warned that 0.4% month-on-month gave an annualized rate close to 5%. Furthermore, he stressed, the three-month annualized rate and the six-month annualized rate of the core CPI stood at 4.5% and 3.9%, respectively. “Both measures have followed an upward path since December 2023,” the expert concluded.

“Inflation in the US stood at 0.4% month-on-month for the third consecutive month, more than double the rate we need to achieve to reduce inflation to 2% year-on-year,” wrote ING strategists after learning of the Bureau’s data. of Labor Statistics (BLS). “The details show that the 0.4% month-on-month increase in core CPI was 0.359% to three decimal places, so we were not far from 0.3%, but it is still too much for the Fed. The ideal would be to reach 0.17% month-on-month each month to reach 2% year-on-year over time, so we continue to operate at double the necessary pace,” they added.

Although the Fed usually focuses on the underlying variant (neither energy nor food) of the personal consumption deflator (PCE) To gauge the progress of inflation, which usually gives more benign readings due to its different composition, a CPI raised to this point would cause a practically inconceivable situation. If this escalation is confirmed little by little, The debate will no longer be if the Fed fails to lower rates this year, but if you have to upload them again. Some prominent voices, such as former Treasury Secretary Larry Summers, have spoken of the possibility of new rate increases in the face of an economy that remains strong and inflation that once again leaves alarming numbers.

The hope of most analysts is that the inter-monthly readings will relax as the index item related to housing calms down. There is some consensus that it is the Housing CPI the one that is inflating the CPI readings. This metric brings together the evolution of the price of rentals that are primary residences and a controversial figure that is the owners’ equivalent rent, a way to include in the CPI what those who already own one spend on housing. If on the one hand, real rents still do not reflect the weakness emanating from other independent company indicators, the controversial equivalent rent has recently generated noise again after having undergone changes in methodology.

“Housing inflation is not falling enough. Most economists had predicted a decline in inflation, as traditional leading indicators pointed downwards. However, housing inflation has stagnated at 5% year-on-year, preventing the core CPI from declining. A positive aspect is that housing has a lower weight in the PCE basket, which is the official objective of the Federal Reserve. Still, the resistance of housing prices remains an issue. cause for concern, especially since it is not clear why they remain so high,” BCA Research economists noted after the CPI report in a note to clients.

Another latent concern revealed by the March CPI report is an inflation of services core excluding housing which is increasing rapidly. The annual variation rate of this measure rose to 5% in March, while the three-month annualized variation is close to 7.8%, its highest level since June 2022. Although most of this increase is associated to transportation services (in March it was largely due to auto insurance and health care services), Federal Reserve officials have often linked this measure to wage growth and core inflation.

“Rent increases remained stubbornly high in March and price pressure increased further for other services, likely reflecting the significant increase in salaries in particular. (…) In view of these figures, the Federal Reserve will no longer have as much confidence that inflation advances “sustainably” towards the 2% objective. Fed Chairman Jerome Powell had cited this as a prerequisite for a rate cut,” noted Christoph Balz and Bernd Weidensteiner from Commerzbank.

Along the way, new challenges also appear. In March, the gasoline It already had an important role in the rise in the CPI and the Biden Administration continues to fear that the turbulent geopolitics will affect the pockets of Americans who go to refuel their vehicles. The price of oil has held up with a certain stoicism with the war in Gaza, but The escalation of recent days with Israel and Iran in direct confrontation opens a dangerous door. Already Ukraine’s attacks on Russian refineries and their possible impact on the prices drivers pay around the world put Washington on guard. Expensive gasoline in the run-up to the presidential campaign would be catastrophic for Biden’s re-election aspirations. His effect on the CPI, although logical, would be another ‘punch’ for the Democrats.

For now, the worrying trend has upended the Federal Reserve’s schedule. The much telegraphed first rate cut in June has vanished in the market bets and, after going through July and September, now the operators do not contemplate a complete drop (25 basis points) in the swaps until November. It would be in the meeting that the central bank will hold on the 6th and 7th of that month, with the electoral count hot. A more than dangerous scenario given the accusations towards the Fed of following political interests. The next milestone will come next Friday, April 26, with the March PCE, which may bring some calm if it shows some relaxation.