Inflation is annoyingly stubborn and keeps tempering enthusiasm that the Federal Reserve will feel comfortable lowering interest rates sometime soon. The latest report from the U.S. Department of Labor released Tuesday showed that the consumer price index (CPI) edged up 0.3 percent from December to January. The increase the previous month was 0.2 percent.
It’s not alarming but it did rattle the stock markets a bit. The three major indices all dropped on the day the Labor report went public. Apparently, the markets wanted more progress in the Fed’s attempts to tame inflation.
Dow Jones Industrial Average: -1.35%
S & P 500: -1.37%
Nasdaq Composite: -1.8%
That day marked the biggest one-day loss since last March. A CNBC article put it this way, “Stocks dropped on Tuesday after hotter-than-expected inflation data for January spiked Treasury yields and raised doubts that the Federal Reserve would be able to cut rates several times this year, a key part of the bull case for the equity market.”
The article included this quote from Art Hogan, chief market strategist at B. Riley Financial: “This may well come as an easy excuse to take some of the froth out of the top of this market that’s been universally higher thus far this year.”
Hogan added this perspective about the CPI’s slight gain: “Just a touch hotter than expectations and proof positive that we’re not on a linear path, but we’re on a path headed lower.”
Farmers are already bracing for reduced incomes in 2024. The USDA’s report last week projected a drop of 25.5 percent in farm income compared to 2023.
Lower inflation could help offset some of the anticipated higher labor costs and pesticide prices, as well as lower commodity prices for the coming year.
The Labor Department report also adds some context to the slight monthly CPI increase. Year to year, prices were up 3.1 percent. Yes, that remains above the Fed’s target of 2 percent. However, December’s comparison to December 2022 was 3.4 percent. So, that’s progress.
And when you broaden this out even more, you see significant progress. Think back to June 2022 when CPI soared to 9.1 percent. That was the highest level of inflation in four decades and signaled trends “that raise the risk of a recession,” an Associated Press report warned.
FLASHBACK FOCUS: Grocery and energy prices pushed inflation higher in June 2022. Read the Associated Press article here that explained the forces fueling recession concerns back then.
But that was then. This is now. And now is when landowners want to see inflation fall more, so the Fed will drop borrowing costs.
There is some reason for optimism…and patience…when you read what those who follow these economic trends for a living anticipate.
Dr. Byron Gangnes has been researching macroeconomic and trade policy issues for the past 30 years. He is Professor Emeritus and UHERO Senior Research Fellow at the University of Hawaii (UHERO is the university’s economic research organization).
Gangnes points out that housing costs continue to drive some of the inflationary rise.
“Shelter inflation over the past six months was slightly higher than it was in the six months ending in December, suggesting that housing cost inflation has yet to fully filter through to overall consumer prices,” he wrote on LinkedIn.
He thinks those shelter costs will subside but sees some other trends that trouble him. “More worrisome is the inertia in prices of other non-energy services (everything from medical care to recreation). The six-month trailing change has been trending up for the past five months and jumped to 5.6% for the July-to-January period.”
Because of those factors, Gangnes summarized that he doesn’t think the Fed will reduce borrowing rates for at least several more months. “…the Fed will need to see a number of months of better inflation performance before they are likely to pivot to rate cuts. Those cuts now look likely to begin this summer at the earliest.”
Orphe Divounguy is a senior economist at Zillow.com and the host of the Everyday Economics podcast. He also zeroed in on the influence of shelter costs as a recent inflationary driver. “The big increase from within the shelter index came from lodging away from home, hotels, and motels. Without that uptick, shelter inflation would have eased much more.”
He added this, “The index for utilities, transportation, and the index for medical services were also among the big culprits.”
The bottom line to the current economic situation, according to Nuveen’s Chief Investment Officer Saira Malik, is that the Fed may keep rates where they are for a while longer. “With core annual inflation still hovering substantially higher than the Fed’s 2% target and the underlying U.S. economy exhibiting remarkable resilience in the face of higher rates, we anticipate data-dependent policy makers will continue to support a higher-for-longer interest rate regime.”
In other words, patience for rate cuts may need to outlast inflation’s obstinance.
Even economists can run low on patience in the Federal Reserve’s policymaking decisions regarding the delicate balance in plotting the country’s economic recovery from the pandemic.
RELATED: A National Association for Business Economics survey showed that more than a fifth of economists believe that the Federal Reserve’s policy has been keeping interest rates too high for too long. Read the survey here.
