Quick Bite | Inflation proving sticky, holding up rate cuts

Once again, the US inflation report surprised to the upside, cruelling hopes that January’s rapid price gains were a one-off. For the second straight month, the Consumer Price Index (CPI) flashed signals that the 2023 disinflation trend may have stalled at the start of 2024.

Source: WSJ

 

If elevated inflation readings in January and February persist, it will raise doubts about the economic narrative that has taken hold on Wall Street, namely that inflation has been suppressed and interest rate cuts are on the way.

Both headline CPI and the core measure that excludes energy and food costs rose 0.4% on a monthly basis, another big gain after a run of milder increases late last year. Over the last three months, core CPI rose an annualised 4.2%. In August, that number was 2.6%.

Key trends that had fueled disinflation last year retreated in February. Gasoline prices surged last month: after four consecutive months of declines, the energy index rose 2.3%, a big factor pushing up overall CPI.

Tailwinds from normalising supply chains helped cool prices for goods, though it remains to be seen how much further that factor has to run. For the first time since May, goods prices excluding food and energy rose, though the increase was slight. The services side of the economy remains especially troubling, including fast-rising insurance prices.

The bottom line is that the data validates the caution expressed by top US Federal Reserve (Fed) officials about cutting interest rates too soon. Meanwhile, the US economy still looks solid, with moderate job gains, a combination that will probably mean the Fed postpones any cuts until June or July.

 

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