March’s Inflation Number Likely to be Worrisome
This week, inflation takes the spotlight. As Tuesday’s report on the consumer price index for March dominates economic news and the markets.
Estimates are that inflation increased at a yearly rate of 8.4% last month, surpassing February’s 7.9% reading and the fastest pace since the early 1980s. The monthly increase is expected to be 1.2%. That would be a record for the recent era of low inflation.
The monthly report will certainly show the complete brunt of the run-up in energy prices triggered by Russia’s invasion of Ukraine in late February. While the price of a barrel of oil has actually dropped since then to around $100 from as high as $139. And, together with it, the cost of a gallon of gas, that drop will not be reflected in March’s number.
In addition to the decline in oil. Another key component of the monthly CPI has likewise receded: that of used car prices. Consumer spending patterns have shifted away from durable goods to services as the economy relocates to a post-pandemic phase. However, again, that might not yet be enough to curb existing inflation.
The inflation will continue to rise?
Still, there are some favorable signs that inflation might have peaked, a hope the Federal Reserve shares as it starts a series of interest rate hikes it began last month. The Fed raised interest rates in mid-March by 25 basis points. However, all signs are that a bigger, 50-basis-point hike is on the table for its meeting in May.
” We recently released our updated prevision and believed CPI will peak in March (also peaking every quarter with Q2 @ 7.9% yr/yr) as greater year-ago base effects take hold, and the pace of total economic growth slows down, which needs to result in price growth relieving on a sequential basis this summer,” Sam Bullard, managing director, and senior economist at Wells Fargo corporate and investment banking group, wrote on Sunday.
” With that said, we completely acknowledge the upside risks to the inflation outlook. Considering the after-effects of the Ukraine-Russia conflict on energy, food, and various other vital commodities,” Bullard added.
” As our projection shows, the descent in inflation is going to be painfully slow,” he said. “We project headline CPI inflation to be still performing at a 6%- plus pace at year’s end … with core CPI also continuing to be raised at 5.2% yr/yr. On balance, we expect the March CPI report to support our projections for a more aggressive 50-bps fed funds rate hike at the (Fed’s) May FOMC meeting.”
The Fed is in a dilemma, having been idle to react to climbing prices that it once labeled as “transitory,” and now needing to engineer a “soft landing” without tipping the economy into recession. Possibilities of a downturn have actually increased, with some economists currently placing the risk as high as 30%.
What to expect
Cleveland Fed President Loretta Mester appeared Sunday on the CBS program “Face the Nation” and stated that while she preferred a more aggressive position than some of her colleagues, she believes the Fed can bring inflation under control.
” So, I think that it will take some time to get inflation down because, as you know, there are various other things taking place in the economy that are adding to price pressures, including the commodity price increases and energy price increases that are taking place as well,” Mester claimed. “So, I think inflation will certainly stay above 2% this year and also following year, however, the trajectory will be that it will certainly be moving down.”
Market rates have actually climbed dramatically, with the yield on the 10-year Treasury striking 2.744% Monday morning. The 30-year bond was trading somewhat higher at 2.774%.
Dow Jones Industrial Average futures were down 130 points ahead of the stock market’s opening.
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