All the data so far is showing inflation isn’t going away, and is making things tough on the Fed

The
last
batch
of
inflation
news
that
Federal
Reserve
officials
will
see
before
their
policy
meeting
next
week
is
in,
and
none
of
it
is
very
good.

In
the
aggregate,
Commerce
Department
indexes
that
the
Fed
relies
on
for
inflation
signals
showed
prices
continuing
to
climb
at
a
rate
still
considerably
higher
than
the
central
bank’s
2%
annual
goal,
according
to
separate
reports
this
week.

Within
that
picture
came
several
salient
points:
An
abundance
of
money
still
sloshing
through
the
financial
system
is
giving
consumers
lasting
buying
power.
In
fact,
shoppers
are
spending
more
than
they’re
taking
in,
a
situation
neither
sustainable
nor
disinflationary.
Finally,
consumers
are
dipping
into
savings
to
fund
those
purchases,
creating
a
precarious
scenario,
if
not
now
then
down
the
road.

Put
it
all
together,
and
it
adds
up
to
a
Fed
likely
to
be
cautious
and
not
in
the
mood
anytime
soon
to
start
cutting
interest
rates.

“Just
spending
a
lot
of
money
is
creating
demand,
it’s
creating
stimulus.
With
unemployment
under
4%,
it
shouldn’t
be
that
surprising
that
prices
aren’t”
going
down,
said
Joseph
LaVorgna,
chief
economist
at
SMBC
Nikko
Securities. “Spending
numbers
aren’t
going
down
anytime
soon.
So
you
might
have
a
sticky
inflation
scenario.”

Indeed,
data
the

Bureau
of
Economic
Analysis
released
Friday
indicated
that
spending
outpaced
income
in
March,
as
it
has
in
three
of
the
past
four
months,
while
the
personal
savings
rate
plunged
to
3.2%,
its
lowest
level
since
October
2022.

At
the
same
time,
the

personal
consumption
expenditures
price
index,
the
Fed’s
key
measure
in
determining
inflation
pressures,
moved
up
to
2.7%
in
March
when
including
all
items,
and
held
at
2.8%
for
the
vital
core
measure
that
takes
out
more
volatile
food
and
energy
prices.

A
day
earlier,
the
department
reported
that
annualized
inflation
in
the
first
quarter
ran
at
a
3.7%
core
rate
in
the
first
quarter
in
total,
and
3.4%
on
the
headline
basis.
That
came
as

real
gross
domestic
product
growth
slowed
to
a
1.6%
pace,
well
below
the
consensus
estimate.

The
stubborn
inflation
data
raised
several
ominous
specters,
namely
that
the

Fed
may
have
to
keep
rates
elevated
for
longer
than
it
or
financial
markets
would
like,
threatening
the
hoped-for
soft
economic
landing.

There’s
an
even
more
chilling
threat
that
should
inflation
persist
central
bankers
may
have
to
not
only
consider
holding
rates
where
they
are
but
also

contemplate
future
hikes.

“For
now,
it
means
the
Fed’s
not
going
to
be
cutting,
and
if
[inflation]
doesn’t
come
down,
the
Fed’s
either
going
to
have
to
hike
at
some
point
or
keep
rates
higher
for
longer,”
said
LaVorgna,
who
was
chief
economist
for
the
National
Economic
Council
under
former
President
Donald
Trump. “Does
that
ultimately
give
us
the
hard
landing?”

The
inflation
problem
in
the
U.S.
today
first
emerged
in
2022,
and
had
multiple
sources.

At
the
beginning
of
the
flare-up,
the
issues
came
largely
from
supply
chain
disruptions
that
Fed
officials
thought
would
go
away
once
shippers
and
manufacturers
had
the
chance
to
catch
up
as
pandemic
restrictions
eased.

But
even
with
the
Covid
economic
crisis
well
in
the
rearview
mirror,
Congress
and
the
Biden
administration
continue
to
spend
lavishly,
with
the
budget
deficit
at
6.2%
of
GDP
at
the
end
of
2023.
That’s
the
highest
outside
of
the
Covid
years
since
2012
and
a
level
generally
associated
with
economic
downturns,
not
expansions.

On
top
of
that,

a
still-bustling
labor
market,
in
which
job
openings
outnumbered
available
workers
at
one
point
by
a
2
to
1
margin
and
are
still
at
about
1.4
to
1,
also
helped
keep
wage
pressures
high.

Now,
even
with
demand
shifting
back
from
goods
to
services,
inflation
remains
elevated
and
is
confounding
the
Fed’s
efforts
to
slow
demand.

Fed
officials
had
thought
inflation
would
ease
this
year
as
housing
costs
subsided.
While
most
economists
still
expect
an
influx
of
supply
to
pull
down
shelter-related
prices,
other
areas
have
cropped
up.

For
instance,
core
PCE
services
inflation
excluding
housing
—
a
relatively
new
wrinkle
in
the
inflation
equation
nicknamed “supercore”
—
is
running
at
a
5.6%
annualized
rate
over
the
past
three
months,
according
to
Mike
Sanders,
head
of
fixed
income
at
Madison
Investments.

Demand,
which
the
Fed’s
rate
hikes
were
supposed
to
quell,
has
remained
robust,
helping
drive
inflation
and
signaling
that
the
central
bank
may
not
have
as
much
power
as
it
thinks
to
bring
down
the
pace
of
price
increases.

“If
inflation
remains
higher,
the
Fed
will
be
faced
with
the
difficult
choice
of
pushing
the
economy
into
a
recession,
abandoning
its
soft-landing
scenario,
or
tolerating
inflation
higher
than
2%,”
Sanders
said. “To
us,
accepting
higher
inflation
is
the
more
prudent
option.”

Thus
far,
the
economy
has
managed
to
avoid
broader
damage
from
the
inflation
problem,
though
there
are
some
notable
cracks.

Credit
delinquencies
have
hit
their
highest
level
in
a
decade,
and
there’s
a
growing
unease
on
Wall
Street
that
there’s
more
volatility
to
come.

Inflation
expectations
also
are
on
the
rise,
with
the
closely
watched

University
of
Michigan
consumer
sentiment
survey
showing
one-
and
five-year
inflation
expectations
respectively
at
annual
rates
of
3.2%
and
3%,
their
highest
since
November
2023.

No
less
a
source
than
JPMorgan
Chase
CEO
Jamie
Dimon
this
week
vacillated
from
calling
the
U.S.
economic
boom “unbelievable”
on
Wednesday
to
a
day
letter
telling
The
Wall
Street
Journal
that
he’s
worried
all
the
government
spending
is
creating
inflation
that
is
more
intractable
than
what
is
currently
appreciated.

“That’s
driving
a
lot
of
this
growth,
and
that
will
have
other
consequences
possibly
down
the
road
called
inflation,
which
may
not
go
away
like
people
expect,”
Dimon
said. “So
I
look
at
the
range
of
possible
outcomes.
You
can
have
that
soft
landing.
I’m
a
little
more
worried
that
it
may
not
be
so
soft
and
inflation
may
not
go
quite
the
way
people
expect.”

Dimon
estimated
that
markets
are
pricing
in
the
odds
of
a
soft
landing
at
70%.

“I
think
it’s
half
that,”
he
said.