Inflation continues

The road to a normal inflationary environment looks longer than it did before. The March Consumer Price Index (CPI) report showed that headline and core CPI both rose by 0.4% on a monthly basis, exceeding forecasts and marking the third month of 0.4% increase in core CPI(1). The increases in headline and core CPI underscore persisting inflationary pressures and were primarily driven by housing and gasoline costs(1). The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, saw a year-over-year increase of 2.5% in March, indicating a moderating inflation pace(2). However, there may be a good and bad news element to this since February’s consumer spending, particularly in services, was hotter than originally reported(2). While moderating inflation is always welcome in this environment, the context was that February was higher than originally reported. This scenario, compounded by the ISM Manufacturing PMI’s unexpected rise and increased input costs(3), suggests a protracted journey back to normal inflation levels.

Additionally, the labor market dynamics further complicate the economic outlook. March witnessed a significant surge in job growth and a dip in the unemployment rate to 3.8%, reflecting the most substantial job growth in nearly a year(4). The savings rate dropped to its lowest level since the end of 2022(4), suggesting an increased reliance on savings for spending among some consumers. The report also showed wages and salaries rose by 0.8%, the largest increase since early last year(4), underscoring the nuanced picture of consumers’ financial health.

Headlines pointing to hot inflation continue to impact US consumer sentiment, which decreased more than expected in early April, with the University of Michigan sentiment index falling to 77.9 from 79.45. Inflation expectations for the next year rose to 3.1%, up from 2.9%, marking the highest expectation for the year, while five- to ten-year inflation expectations reached a five-month high of 3%(5). Despite the rise in inflation expectations, consumers do not seem overly concerned about a resurgence of high inflation, according to the director of the survey(6).

Bottom line

The US economy is navigating a complex environment marked by strong stock market performance, sticky inflation that occasionally shows signs of moderating, and a resilient labor market. The Federal Reserve’s stance remains cautious, refraining from rate cuts amidst persistent inflation and robust job growth, pushing market expectations for the first rate cut to sometime after the Federal Reserve’s June policy meeting. On top of shaping the Federal Reserve’s interest rate policy decisions, the culmination of consumer spending, inflation trends, and labor market strength will also likely shape the direction of both inflation and market sentiment.

(1) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(2) Source: Bureau of Economic Analysis, https://www.bea.gov/news/2024/personal-income-and-outlays-february-2024
(3) Source: Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/march/
(4) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(5) Source: University of Michigan, http://www.sca.isr.umich.edu/
(6) Source: Bloomberg News